The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Flash Orders

  • From Vol. 2 No.44 (Nov. 5, 2009)

    U.S. Senate Subcommittee on Securities, Insurance and Investment Holds Hearing on Dark Pools, Flash Orders, High Frequency Trading and Market Surveillance

    Dark pools, flash orders and high frequency trading have received significant regulatory attention of late.  On October 21, 2009, the SEC proposed rule changes regarding dark pools.  Dark pools are electronic networks that facilitate trading of shares outside of traditional exchanges and give certain investors the ability to trade large blocks of shares without notifying the entire market of the transaction.  The proposed rules would require a greater proportion of stock quotes to be displayed and would restrict communication between dark pools.  The overall goal of the proposed rule changes is to push more orders onto publicly displayed markets.  The SEC also has recently proposed a ban on flash orders, a practice in which certain investors are privy to a quote for a short time before others can view that quote.  See “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  Finally, high frequency trading has been receiving significant attention of late, both from regulators and the press, broadly focusing on the question of whether the practice unfairly privileges traders with access to co-located computers on or near exchanges.  See “Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  The recent regulatory attention on these topics was the backdrop for a hearing on October 28, 2009 hosted by the U.S. Senate Subcommittee on Securities, Insurance and Investment.  At the hearing, the Subcommittee heard testimony from regulators, industry participants and a fellow senator on, broadly, whether the current regulatory structure is up to the task of regulating the innovative, fast-evolving topics of dark pools, flash orders and high frequency trading.  The Hedge Fund Law Report attended the hearing, and this article summarizes the points discussed at the hearing of most pressing relevance for hedge funds.  Specifically, we offer significant detail on what was said, and what the tone and substance of the hearings may mean for regulatory developments in the near term with respect to dark pools, flash orders, high frequency trading and market surveillance.

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  • From Vol. 2 No.32 (Aug. 12, 2009)

    What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?

    While much ado has been made of flash orders in the news lately, little focus has been placed on the mechanics of flash orders, the legal and regulatory basis for flash orders, who is trading based on flash orders, and the benefits and downsides of flash orders for both investors and the market.  Because of the likelihood that the Securities and Exchange Commission (SEC) will take action to regulate or eliminate the use of flash orders, the debate over these issues is particularly relevant.  There is some question as to whether the SEC will amend current regulations to eliminate flash orders altogether, or whether additional requirements could be imposed on flash orders that would satisfy regulators’ needs for transparency while still leaving flash orders in place.  In addition, because hedge funds and other firms may have already invested in the technology necessary to execute flash orders or planned to invest in such technology, understanding the debate and the potential outcome of SEC regulation may enable hedge funds to allocate resources in light of likely regulatory outcomes.  This article offers a comprehensive overview and analysis of issues raised by flash orders, including: a description of what flash orders are; the legal basis for flash orders; recent challenges to flash orders from Senator Charles Schumer and the SEC’s response; the upside to hedge funds and others of flash orders; the downside; the likelihood of regulation and the shape such regulation may take; and the implications of the foregoing for hedge funds and their managers.

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