US Senator Charles Schumer has called on the Securities and Exchanges Commission (SEC) to ban "flash" trades, where users are given an advanced peek at unfilled orders ahead of the wider market.
Offered by Nasdaq OMX, Direct Edge ECN and Bats Exchange, the flash orders allow members who pay a fee to see buy and sell order information for milliseconds before they go to the wider market.
Critics say this creates a two-tier system, giving an unfair advantage to high-frequency traders with fast, powerful computer systems that can take advantage of the information quickly.
Nyse Euronext has hit out at its competitors over the issue, recently sending a letter to the SEC 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.
Schumer has now sent a letter to SEC chairman, Mary Schapiro asking for the practice to be banned, warning that if it is not he will introduce legislation on the matter.
Says the letter: "This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system, where a privileged group of insiders receives preferential treatment. If allowed to continue, these practices will undermine the confidence of ordinary investors, and drive them away from our capital markets."
However, Direct Edge chief executive William O'Brien, told the Financial Times that if flash orders are banned, liquidity will be driven away from exchanges, creating a two-tier market.
Flash orders often go to dark pools, which themselves are currently under scrutiny from Schapiro, who warned last month that regulation may be necessary amid concerns about the risks they pose to market transparency and integrity.