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Flash Dead. Don’t Let The Door Hit You in the…

28

February, 2011

New Jersey’s Direct Edge announced that it was dropping flash orders effective today:

“Direct Edge will cease to offer its Competition for Price Improvement (“CPI”) functionality as of the close of business Monday, February 28, 2011.  No customer action is required.  All CPI-eligible orders will be unaffected, except that CPI will no longer be part of the routing strategy.  For more information, please contact your Direct Edge sales representative.”

Since the summer of 2009, nearly 1 ¾ years ago, the industry has universally spoken out against the practice. Morgan Stanley’s comment letter was among the first voices of criticism, along with ZeroHedge, the NYSE, and Themis. Even BATS and NASDAQ, who had spoken out against the practice, then instituted it anyway for fear of market share loss, eventually pulled flash orders.

Direct Edge was the hold out. They maintained that the practice helped clients get price improvement (you know… like when instead of buying 800 shares at $21.00, you buy it at $20.999). What it did do is help the owners of Direct Edge grow their “internalization businesses”. Even with the writing on the wall late last year, they did everything they could to keep their flash order, even by tweaking it. In November 2010 they modified it (enhanced it) by calling it a 10 millisecond auction (CPI) Story here; hey, if the NYSE is an acceptable auction market, then theirs must be ok also? I mean, if the analogy type of reasoning worked for “specialists and collocation”, it has to work here as well!

So why the change of heart? Is it because Direct Edge’s esteemed directors, including a professors at Georgetown, realized that the practice resulted in more front-running than meaningful price improvement? Did they get religion? Did they get a glimpse of the actual transaction cost analysis reports that  show Direct Edge’s adverse toxicity? Maybe. Or did they just want to do everything in their power to not make waves with the Deutsche Bourse NYX upcoming merger, in which Direct Edge is a beneficiary, as they are 31% owned by the ISE, which is owned by Deutsche Bourse? Maybe. And just maybe their change of heart has something to do with their reading of this SEC docket:

SEC Edocket February 18th

 

Specifically, the Commission is concerned about the extent to which a 10 millisecond auction would provide a meaningful opportunity for price improvement, or would materially increase the risk that a Step-Up order will miss an execution.

 

In view of the issues raised by the proposal, the Commission has determined to institute disapproval proceedings at this time to determine whether the Commission should disapprove the proposed rule change.

Regardless, know that this is good for all of you. Your voices are being heard in Washington, and for this you should be proud.

By the way, please file this flash episode away permanently in your frontal lobes as Exhibit A of what for-profit Exchanges will do if you are not vocal, and you allow them to. Flash. Data Feeds. Questionable Order Types. Arbitrages built into the system to encourage Hot Potato Volume. Their interests have very little to do with what is good for investors, most traders, and capital formation and economic growth. Their interests have everything to do with  their own short term maximization of their profits, fairness and ethics be damned.

  

 

 

Where we left off 4:00pm EST:

INDU                     12,130.45                              +61.95

SPX                        1,319.88                                                +13.78

CCMP                    2,781.05                                                +43.15

Futures now at 7:00 am EST:

DJA                                        +35

SPA                                        +4.80

NDA                                       +7.25

Key Data out today:

 

08:30:                    Personal Income

08:30:                    Personal Spending

09:45:                    Chicago Purchasing Manager

10:00:                    Milwaukee NAPM

10:00:                    Pending Home Sales

10:30:                    Dallas Fed

 

Since the prior close, some key stories:

 

-       Dollar weakens before Bernanke address.

-       Direct Edge to end flash orders After today.

-       Government shutdown likely averted for another two weeks.

-       China lowers its growth projections from 8% to 7%.

-       Chinese stocks higher, as government announces it will  build 36 million affordable homes.

-       Libya. Ongoing. Although they allowed an oil tanker to go to China.

-       Libyan unrest spreads to Oman.

-       Sultan of Oman orders the hiring of 50,000 protesters to appease demonstrators.

-       Commodities: – a new report being prepared by the OECD will conclude that the recent increase in commodities prices is due to higher demand. Not speculators.

-       Warren Buffet is itching to buy stuff.

-       GS looking to repay Buffet loan.

-       The King’s Speech wins many awards.

-       Short sales hit three year low.

-       Barron’s positive MMM, WHR, CMCSA, TWX, TGT, LLY, MMM, BA

Earnings:

 

Pre-market:  ANV, AWI, EX, ENDP, FELE, JKS, NSA, MINI, OSG, TREX, VIT, WRI

 

After the Close: AONE, DGI, DTSI, ISIS, KAMN, LYV, RST, SLXP, SONS, SYKE, TWGP, UHS, VVUS, YOKU

  

 

Significant Movers This Morning:

MRX +18%, ATPG +11%, LUV +7%, MHP + 5%, SOLR +4%,

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