Flash Trading

>> Wednesday, August 5, 2009

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Yes, I know that most of you haven't heard about this thing they call flash trading because it's quite new, but if you are a stock trader or someone who has been trying to make your fortune out of the stock market, probably you've heard about it. Well, the thing is SEC is moving to ban flash trading. What's in flash trading that makes it worthy of being banned? They say that it's unfair to most traders. In oreder for you to understand what is flash trading and how it is unfair to most traders, here is part of a very good explanation of it from The Washington Post :

Think about it like this: If a share of Stock X moves from $25 to $25.01 and back again to $25 in one second of normal trading, that's only one penny of profit realized during that one second of that stock's life. No human being can or will make money off that.

But a computer program can, if, for instance, it is programmed to buy 300,000 shares of Stock X at $25 and sell it at $25.01, even if that happens over only one second. Then do it again, and again and again, throughout the entire day. You can see how the arbitrage math adds up. Further, high-speed trading puts liquidity in the markets, which is a good thing.

What we're talking about here is special kind of high-frequency trading, called flash trading, and the reason it's on the hot seat is because it may be unfair to all traders.

In flash trading, some members of some exchanges -- including Nasdaq, Direct Edge and BATS -- get a look at buy and sell information a millisecond before it becomes available to the public.

Normally, this wouldn't make any difference. But when you have computers capable of making millions of computations in the span of a millisecond, it could mean millions of dollars.

Anyone can see how this is tacitly unfair: You have to have access to a super-computer to be a flash-trader. If you don't, you're at a disadvantage.


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