"Firms in the flash game make money using the oldest trick on Wall Street: grabbing an information edge over everybody else, and finding a crack in the regulations to take advantage of it. It’s the digital, lightfast equivalent of a stock tip from your barber. The way flash trading works is complicated, but it boils down to this: Traders with enough computing power can get a split-second, advance look at other people’s orders. That’s just enough time for their computers to race into action, taking advantage of the sneak peek to move ahead of the original traders and profit ahead of them.
So if, say, you knew a large investor was about to spend $10 a share on a stock currently trading at $9, you could swoop in and buy up a wad of the $9 shares without the bidder ever knowing you had snuck in ahead of his purchase. (The actual spread is generally in the neighbourhood of only two or three cents.)"
Seems to me that either the reporter is pretty clueless, or the 'large investor' in his example is assumed to be pretty clueless. Flash orders have are and have always been available strictly by the choice of the person entering the order. No one is ever forced to enter a flash order.
In many situations, I like to send flash orders, and find that they add to my profitability. For example, assume that I want to place a market order to buy a small number of shares (200, for example), and the inside bid/offer is 36.14/36.15 with plenty of size on both sides. I would much rather place a flash order, as this could lead to small price improvement, but more importantly I will very likely get a fill with reduced ECN fees than a non-flashed order.
On the other hand, if I want 2500 shares of the same stock, and the inside offer is only for 400 shares, then it would be a poor choice for me to send a flash order (which would likely get essentially front run by the firms seeing the flash order, to push up the price a few pennies.
In the hands of a knowledgable trader, flash orders are a good tool to have available in your toolbag, not an opportunity to get ripped off, as the media and politicians would have you believe. Personally, I was sad to see the BATS flash orders (BOLT orders) stop being offered at the start of September, as they improved my overall order execution quality.
Anyway, I just thought I'd toss in my two cents for the sake of discussion.
Good luck to all,
-Eric |
