It was only a few months ago that a blogger calling himself Tyler Durden and writing for “Zero Hedge” started to call attention to a Wall Street electronic trading technique called “high frequency trading.” Now Senator Charles Schumer has called for a high-frequency technique called “flash trading” to be banned by the SEC.
The mainstream complaint about the technique is that it give high-frequency traders an unfair advantage akin to front-running. Others fear that it could be creating a systemic instability in prices as various high-frequency traders attempt to out do each other by jumping ahead of order bids with ever faster trading.
Here’s how the NYT describes flash trading.
When buy or sell orders are submitted to marketplaces like Nasdaq, they are sometimes flashed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — before they are routed to everyone else. In that half-second, fast-moving computer software can gain valuable insights regarding growing or declining demand in certain stocks, and can trade ahead of other market participants, pushing prices up or down.
Although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds. In recent years, some of the largest financial companies, including Goldman Sachs, have earned enormous profits with such computers, which are very expensive and often housed right next to the machines that power the marketplaces themselves.
Schumer says that he may introduce legislation if the SEC doesn’t ban the practice, according to the New York Times.
“The hallmark of our markets are that they are open and above board and the little guy has as much of a chance as the big guy,” Mr. Schumer said in an interview with the Times. “This takes a dagger to the heart of that concept.”
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