Flash trading
Encyclopedia
Flash trading, otherwise known as a flash order is, according to industry trade publication, Traders Magazine, defined as “a marketable order sent to a market center that is not quoting the industry's best price or that cannot fill that order in its entirety. The order is then flashed to recipients of the venue's proprietary data feed to see if any of those firms wants to take the other side of the order. This practice enables the market center to try to keep the trade.” Under an exception to Rule 602 of Regulation NMS flash orders are currently allowed.
Bloomberg states: "Flash systems trace their roots as far back as 1978 to efforts by exchanges to electronically replicate how a trader might yell an order to floor brokers before entering it into the system that displays all bids and offers. Markets have evolved since the days of floor brokers’ dominance, with computer algorithms now buying and selling shares 1,000 times faster than the blink of an eye."
More recently flash orders gained popularity in the options markets, where since as early as 2000 the Chicago Board Options Exchange
(CBOE) began using the particular type of order to help improve the speed of trade executions for its clients.
In 2006, Direct Edge
began offering customers the ability to flash orders in the equities market. Direct Edge became a U.S. exchange
in July 2010
. Nasdaq
and Bats
(U.S. exchanges) created their own flash market in early 2009 in response to the Direct Edge market. Both voluntarily discontinued the practice in August 2009
.
Direct Edge's response to this is the data that flash trading reduces market impact
, increases average size of executed orders, reduces trading latency, and provides additional liquidity. Direct Edge also allows all of its subscribers to determine wither they want their orders to participate in flash trading or not so brokers have the option to opt-out of flash orders on behalf of their clients if they choose to. Because market participants can choose to utilize it for additional liquidity or not participate in it at all Direct Edge believes the controversy is overstated stating:
Critics of the practice contend this creates a two-tiered market in which a certain class of traders can unfairly exploit others, akin to front running
. Exchanges claim that the procedure benefits all traders by creating more market liquidity and the opportunity for price improvement. However, a December 2009 article in The Banker noted: “in a bid to fuel the controversy and fill column space, however, several commentators and pundits have complained bitterly that flashes expose information that may allow traders to ‘front-run’ orders. The widespread perception, meanwhile, that flash orders are the preserve of hyper-sophisticated high-frequency traders has further cemented the misguided notion that the lay retail investor is in turn being cheated.”
Direct Edge's response to the "two-tiered market" criticism is as follows:
The Securities and Exchange Commission in September 2009 proposed banning the practice as part of regulatory reforms
in the wake of the Financial crisis of 2007–2010. , the proposals have not been implemented. Even though most programs have been stopped voluntarily, it is still possible, at least with Direct Edge.
Bloomberg states: "Flash systems trace their roots as far back as 1978 to efforts by exchanges to electronically replicate how a trader might yell an order to floor brokers before entering it into the system that displays all bids and offers. Markets have evolved since the days of floor brokers’ dominance, with computer algorithms now buying and selling shares 1,000 times faster than the blink of an eye."
More recently flash orders gained popularity in the options markets, where since as early as 2000 the Chicago Board Options Exchange
Chicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
(CBOE) began using the particular type of order to help improve the speed of trade executions for its clients.
In 2006, Direct Edge
Direct Edge
Direct Edge is a Jersey City, NJ-based stock exchange operating two separate platforms, EDGA Exchange and EDGX Exchange. Since March 2009, Direct Edge has had a market share in the range of 9%-12% of U.S. equities trading volume, regularly trades 1 billion to 2 billion shares per day...
began offering customers the ability to flash orders in the equities market. Direct Edge became a U.S. exchange
U.S. Futures Exchange
U.S. Futures Exchange was a Chicago-based, electronic futures exchange that terminated all exchange operations effective December 31, 2008. On December 17, 2008, MF Global had announced USFE was for sale or would be closed by December 31, 2008. USFE was originally Eurex US who bought BrokerTec,...
in July 2010
July 2010
July 2010 was the seventh month of that year. It began on a Thursday and ended after 31 days on a Saturday.- International holidays & observances :* 1: Canada Day * 1: July Morning * 1: Republic Day...
. Nasdaq
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
and Bats
Bats Exchange, Inc
BATS is a stock exchange based in Lenexa, Kansas, a satellite city of Kansas City, Missouri. BATS was founded in June 2005 as an ECN and its name stands for Better Alternative Trading System....
(U.S. exchanges) created their own flash market in early 2009 in response to the Direct Edge market. Both voluntarily discontinued the practice in August 2009
August 2009
August 2009 was the eighth month of that year. It began on a Saturday and concluded after 31 days on a Monday.- Portal:Current events :This is an archived version of Wikipedia's Current events Portal from August 2009....
.
Direct Edge's response to this is the data that flash trading reduces market impact
Market impact
In financial markets, market impact is the effect that a market participant has when it buys or sells an asset. It is the extent to which the buying or selling moves the price against the buyer or seller, i.e. upward when buying and downward when selling...
, increases average size of executed orders, reduces trading latency, and provides additional liquidity. Direct Edge also allows all of its subscribers to determine wither they want their orders to participate in flash trading or not so brokers have the option to opt-out of flash orders on behalf of their clients if they choose to. Because market participants can choose to utilize it for additional liquidity or not participate in it at all Direct Edge believes the controversy is overstated stating:
"Misconceptions respecting flash technology have, to date, stirred a passionate but ill informed debate."
Critics of the practice contend this creates a two-tiered market in which a certain class of traders can unfairly exploit others, akin to front running
Front running
Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers...
. Exchanges claim that the procedure benefits all traders by creating more market liquidity and the opportunity for price improvement. However, a December 2009 article in The Banker noted: “in a bid to fuel the controversy and fill column space, however, several commentators and pundits have complained bitterly that flashes expose information that may allow traders to ‘front-run’ orders. The widespread perception, meanwhile, that flash orders are the preserve of hyper-sophisticated high-frequency traders has further cemented the misguided notion that the lay retail investor is in turn being cheated.”
Direct Edge's response to the "two-tiered market" criticism is as follows:
"First it is difficult to address concerns that may result, particularly when there is no empirical data to support such as result. Furthermore, we do not view technology that instantaneously aggregates passive and aggressive liquidity as creating a two-tier market. Rather, flash technology democratizes access to the non-displayed market and in this regard, removes different "tiers" in market access. Additionally, any subscriber of Direct Edge can be a recipient of flashed orders."
The Securities and Exchange Commission in September 2009 proposed banning the practice as part of regulatory reforms
Regulatory responses to the subprime crisis
Regulatory responses to the subprime crisis addresses various actions taken by governments around the world to address the effects of the subprime mortgage crisis....
in the wake of the Financial crisis of 2007–2010. , the proposals have not been implemented. Even though most programs have been stopped voluntarily, it is still possible, at least with Direct Edge.