The Investment Company Institute (ICI), which represents mutual funds, recently wrote a letter to the SEC complaining about U.S. stock exchanges that “facilitate strategies” for high-speed trading firms. This could lead to “market disruption and an advantage for market participants at the expense of long-term investors,” the letter said.

Brokerage firm Themis Trading has pulled a significant portion of its trades off major exchanges over the past year because of potential unfair practices, says co-founder Sal Arnuk.

The SEC is looking into how exchanges execute orders and whether high-frequency traders, who sometimes cancel orders almost as soon as they are made, are gaining an advantage over other market participants. The Senate Banking Committee was scheduled to discuss the issue yesterday. NASDAQ Vice President Eric Noll was invited to attend, promising to provide “scientific evidence” proving that high-frequency trading “adds value to the market.”

Even as stock prices have risen this year, investors are moving away from public platforms. In the third quarter, 5.9 billion shares were traded daily on U.S. exchanges, the lowest level in five years. Over the three quarters, an average of 6.5 billion shares were traded daily, compared with 8.5 billion in 2010 and 9.8 billion in 2009, according to Equity Research Desk.

Large investment firms are moving orders to “dark pools,” whose share of stock trading has increased from 3% to 15% since 2007 (Tabb Group data).

The SEC is looking into order types, with critics arguing that some order types allow high-frequency traders to get ahead of the curve. Exchanges have countered that order types are available to all customers. NASDAQ held a presentation in November for customers, including mutual funds, to explain how its order types work. But ICI General Counsel Ari Bernstein said there is a possibility that “certain order types are being used as a tool against ordinary investors.”

Traders say Goldman Sachs and Credit Suisse, which act as intermediaries between the funds and exchanges, are also fielding questions from the funds about whether the exchanges are giving high-frequency traders an unfair advantage.

The current market situation bodes poorly for exchanges. In October, 17% of NYSE-listed issuers had at least half of their stock trading on over-the-counter platforms, up from 7% in 2010. Brokerage firms that manage dark pools do not have to disclose as much information to regulators as stock exchanges do.

It's not comfortable on the stock exchange