The boss of Direct Edge, the alternative trading system that pioneered the introduction of flash order types three years ago, has launched a robust defence of the controversial practice as regulators hint at a looming crackdown.
Flash trades, where users are given an advanced peek at unfilled orders ahead of the wider market, have been in the spotlight in recent days after US Senator Charles Schumer called on the Securities and Exchanges Commission (SEC) to ban them.
This week SEC chairman Mary Schapiro confirmed the practice will be outlawed as part of a wider look at dark pools and high-frequency trading.
Whilst Bats and Nasdaq OMX have now signalled their willingness to support a ban on the order type, Direct Edge has launched a robust defence of the practice.
The ATS was the first to take advantage of flash orders, introducing its enhanced liquidity provider programme three years ago, well before its rivals followed suit.
In a letter to members, the platform's CEO William O'Brien says the enhanced liquidity provider programme was designed to provide better execution quality to investors and their brokers.
"To discreetly ban or eliminate ELP functionality without any other market structure changes would simply deny brokers and investors access to liquidity they previously enjoyed, with no realistic alternatives available to them," says the letter.
O'Brien concedes flash order types are not right for every one but insists "no one has offered any hard evidence that usage of such orders by a broker or investor is causing quantifiable harm to themselves, anyone else, or the system as a whole".
The letter says every customer who uses the programme chooses to do so, and any that wishes to be an ELP can, levelling the playing field.
The Direct Edge response to the expected ban is in stark contrast to the approach of Nasdaq OMX and Bats.
Senator Schumer says Nasdaq OMX CEO Robert Greifeld has told him the exchange supports a ban and only "began reluctantly offering the practice" after competitors did so.
In a letter, Joe Rattermanm CEO of Bats has also expressed support for a ban, asking competitors: "Are you open to a coordinated approach to withdrawing flashed orders?"
The other big player in the US, Nyse Euronext does not offer flash orders and sent a letter to the SEC before Schumer's intervention saying that the delay in shipping orders flies in the face of Reg NMS which was introduced to guarantee best execution at the best price as soon as orders became available.
Update Nasdaq OMX has issued a statement saying that it will voluntarily cease offering flash order types, effective 1 September, 2009.
"We appreciate that Chairman Schapiro and the Commissioners will assume overall leadership for the industry to conduct a comprehensive review of all issues related to flash orders. We recognize the SEC's rulemaking process will take time, yet as an exchange we have the ability to move on our own. We respectfully call on other markets offering similar functionality to make the same decision."
Bats has also announced that it will voluntarily cease offering the Bats Optional Liquidity Technology (Bolt) order type effective September 1.
The moves by Bats and Nasdaq OMX has spurred a response from Direct Edge. In a statement issued late Thursday evening, the company says: "Direct Edge has suspended its plan to offer flash functionality (tentatively entitled the "Flare" order) similar to that previously introduced by NASDAQ and BATS, voluntarily withdrawing a related rule filing with the SEC. Direct Edge will maintain current ELP functionality so as to preserve current customer choice and flexibility. Direct Edge supports the SEC's broad approach to the myriad issues that have been the focus of recent attention and will, of course, abide by any SEC decisions regarding this or any other matter."