Equity market structure is influenced by regulation. Regulation is political. Politics, it is often said, involves compromise. No one ends up with exactly what they want.

So, it is no surprise that any innovation or regulation that could have an impact on market structure is often the subject of highly contentious debate. The ongoing discussion on the new flash order types rolled out by Nasdaq Stock Market and BATS Exchange, or more broadly, the relationship between displayed and non-displayed liquidity, is no exception.

Despite a myriad of legal, often argumentative wrangling over the merits and disadvantages of flash orders, the debate is really about whether or not internalization is good for the market. "Good" depends who you are.

If you are a dark pool, an exchange offering a flash order, an ECN with an order that exposes liquidity to a select pool of participants, internalization is good because you make money. If you are an exchange or ECN without a specialized order type, internalization probably isn't so good because you lose order flow and don't generate revenue.

If you are an institutional trader, internalization is good so long as it does not impede market price discovery because you can reduce transaction costs. If you are a retail trader, you probably don't care so long as the displayed markets in which you are trading fairly reflect stock price.

The Securities and Exchange Commission speaks for the retail investor, recognizing his confidence in the market is essential to fulfill its underlying purpose. So the question in the eyes of the SEC is along the lines of how internalization impacts price discovery and spreads in the open market.

Our view is that internalization will ultimately impact price discovery and spreads in the open market. However, we don't know to what degree liquidity must be internalized to reach that point. We don't think anyone does. We hope the SEC will continue its time-honored approach to regulation, guiding market evolution and stepping in only where necessary and usually with input from practitioners. This approach has kept innovation alive in the capital markets.

So, do flash orders impede price discovery and effect spreads? At this point we don't think so. Offered by a few venues where access to the flash liquidity is generally available, we think these orders offer choice to traders without harming price. Choice is good. So we think the orders should be permitted.

However, we believe that the SEC should monitor flash order volume and monitor the potential for these orders to become a commodity, at which point we believe price will be affected.

The opinion piece can be viewed in its entirety on the firm's website here.

--Matt Samelson is a Principal at Woodbine Associates, LLC, specializing in equity market structure, trading venues, electronic trading, and transaction cost analysis. He has a wealth of experience in U.S. and international equity sales and trading, quantitative analysis, consulting, and research. He has in-depth knowledge of trade strategy formulation, algorithmic trading, market structure, transaction cost analysis, and trading technology