Flash trades

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Flash trading is a practice in which some equity exchanges hold orders to buy and sell shares for a split second before making that information public (available to other exchanges).[1] The exchanges' customers can view these prices ahead of other traders for a fee. High-speed computer software can take advantage of that brief period between when an order is placed and when it's executed to allow those members to potentially get better prices and profits by slipping in and making the trade themselves.[2]

Offered by Nasdaq OMX Group, BATS, Direct Edge and CBOE Stock Exchange, flash trades are designed to enable those market centers to execute orders within their markets when another market is quoting the industry's best price. In flash orders offered by Nasdaq and BATS, information about the marketable order is displayed in the exchanges' proprietary data feeds to generate orders that will meet or beat the industry's best price. Direct Edge sends order information to a group of "enhanced liquidity providers" to generate order responses.[3]

Flash trading was put under scrutiny in July of 2009, when U.S. Senator Charles Schumer proposed to the Securities and Exchange Commission to ban flash orders because of the unfair advantage they allegedly create for hedge funds and Wall Street firms who use computer-driven trading strategies. [4] Schumer said that if the SEC did not institute a ban, he would introduce legislation to do so.

Shortly after that, on August 6, 2009, Nasdaq OMX and BATS said they would voluntarily end flash orders on their marketplaces.[5]

Direct Edge’s Enhanced Liquidity Program (ELP), Nasdaq’s flash order program, and BATS Exchange’s Bolt Option Liquidity program, allow certain members to receive information about orders before the public. According to Senator Schumer, they allow those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity.[6]

References

  1. High-Frequency Trading Faces Challenges. Bloomberg.
  2. Meltdown 101: 'Flash orders' on Wall Street. Forbes.
  3. SEC Ban on Flash Order Coming, says Sen. Schumer. Traders Magazine.
  4. High-Frequency Trading Faces Challenge as Schumer Presses SEC. Bloomberg.
  5. Nasdaq and BATS to Kill Flash Orders. Traders Magazine.
  6. Nasdaq: SEC Should Expand Focus Beyond Flash Orders. Securities Industry News.