The Securities and Exchange Commission is moving toward banning a trading practice that gives some brokerages a split-second advantage in buying or selling stocks.
SEC Chairwoman Mary Schapiro said in a statement Tuesday that the agency is working to create a rule to ban the trades known as flash orders.
Flash orders give certain members of exchanges including Nasdaq, Direct Edge and BATS the ability to buy and sell order information for milliseconds before that information is made public. High-speed computer software can take advantage of that brief period to allow those members to get better prices and profits.
"I have asked the staff for an approach that can be quickly implemented to eliminate the inequity that results from flash orders," Schapiro said. Any proposal to eliminate the orders would still have to be approved by the entire commission and be open to public comment before being implemented.
Sen. Charles Schumer, D-N.Y., a critic of the orders, said in a statement that Schapiro personally assured him the SEC would ban the practice. Last month, Schumer sent a letter to the SEC urging it to eliminate flash orders and said that if it didn't, he would write legislation to do so.
Banning flash orders is more about the perception of fairness than any practical change in trading, said Sang Lee, a managing partner at Aite Group. He noted flash orders only make up around 2 percent or 3 percent of total trading volume.
The move to ban flash orders would not have a major impact on the market share of exchanges, Lee said. The long-term trend of established exchanges such as New York Stock Exchange losing business to newer participants like Direct Edge and BATS will continue, regardless of whether they can attract customers through flash order programs, he said.
Exchanges have become increasingly competitive as they try to add more clients. However, that has led to price cuts exchanges charge to customers in recent quarters, which have pressured margins.
In fact, BATS spokesman Randy Williams said the company began offering flash orders because of increasing competition. Williams said BATS supports any review of flash orders.
"We're ready to discuss it if the SEC asks about it," Williams said.
Direct Edge's CEO William O'Brien also said in a statement his company would welcome any SEC review of flash orders.
A spokeswoman for Nasdaq did not immediately return requests for comment on the potential ban.