At a speech addressing the Financial Services Roundtable in September, SEC Chairman Mary Schapiro said, "We issued a proposal to ban marketable flash orders last week so that a select group of traders does not receive an unfair advantage by their unequal access to best price information. And we will continue to focus on market activities that favor a few at the expense of overall investor fairness."

She continued, "In short, where market activities are off the screen, below the radar, difficult to track and generally opaque, there is always a greater possibility for mischief. As a country we pride ourselves on our open, efficient and transparent securities markets. Where market activity goes underground, it can undermine investor confidence in our public markets and inevitably raises the question of whether everyday investors are getting a fair deal. Where oversight is lacking, trouble often follows. And where transparency is limited, accountability becomes difficult to achieve."

But what is "fair," and where does high-frequency trading fall in the fairness spectrum?

Narang points to three market practices for which the SEC already has proposed or is likely to propose new regulation: flash trading, dark pools and high-frequency trading. "Of these three areas, the only one which truly creates a two-tiered market place is flash trading," he contends. "In this case insiders to the exchange -- the members -- get a first look at certain types of customer order flow. But only about 4 percent of all orders are flashed."

In the case of flash orders, Narang adds, it was obvious that regulators needed to address the issue, and the economic impact of regulatory changes will be minimal. "The actual act of flashing the order wasn't the problem, but it gives the recipient the ability to front run the customer whose order has been flashed," explains Narang. "It doesn't mean that every time an order is flashed there is front running, but it would be illegal if it was caught."

According to Narang, most flash order participants aren't interested in doing anything illegal. But, "Why put a structure in place where someone can front run someone else?" he says.

Fair Game

On the topic of high-frequency trading, however, Narang argues that the SEC should not impede the practice in any way. "There is nothing unfair about the system in this case -- there is no second tier," he asserts. "Anyone who wants to invest the resources can compete."

Narang insists that there are examples of similar models in other industries -- "For example, a pharma firm that creates drugs and has a massive research structure," he relates. "Anyone can go and get funding and start researching [drugs], but the odds that they will succeed are low." Similarly, he continues, "The odds that [retail investors] can pull together the capital [to participate in high-frequency trading] are low, but there is nothing structurally unfair about the [opportunity to] invest their assets -- its Econ 101."

There isn't anything problematic about a trading firm building the infrastructure and putting the expertise in place to gain an advantage, Narang concludes. "Warren Buffet is so good at picking stocks, and he has access to certain resources that mom and pop investors don't have, and no one begrudges him," Narang says. "Why is what he does OK but what high-frequency traders do is not OK? It's the same sort of thing -- the expertise, dedication and the fact that they take it very seriously."

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