Friday, August 7, 2009

The Debts of the Spenders: NASDAQ Acknowledges Flash Trading As a Blatant Abuse of Power

Now, the most vaunted of financial doyennes has come out against Flash trading - the notorious industry practice where institutional insiders get to front run smaller traders through priviledged glimpses of data milliseconds before everyone else sees them. The Financial Times ran this interesting opinion piece by a senior NASDAQ spokesman who VOLUNTARILY agreed to stop flash trading:

Exchanges should unite to end flash orders

By Bob Greifeld

Published: August 6 2009 18:34 | Last updated: August 6 2009 18:34

As noted in a letter last week to Mary Schapiro, chairman of the Securities and Exchange Commission, Nasdaq OMX has been examining questions related to the increasing prevalence of “flash” order types in the cash equities market, as well as a related trend in US markets towards “darkness” – activity or orders not transparent to the full market.

In looking at the use of flash order types, it is important to understand where they came from, why they exist and why electronic markets including Nasdaq OMX have adopted them. Flash orders originated from and remain an accepted practice of exchanges with a trading floor, with the effectiveness of the “flash” limited by the distance a human voice could travel. These voice flash orders are the raison d’ĂȘtre for people who work on the floor of an exchange. As technology was added to floor trading operations, automation of these flash capabilities occurred through systems such as Block Talk on the NYSE. In addition, fully electronic versions of this floor flash capability were introduced by the CBSX and Direct Edge.

Kudos goes to Zerohedge, Mark Denniger, and all the other web bloggers who work hard to retain transparency among markets. Their efforts have finally brought institutional recognition of these blatant abuses of power - even when they are not recognized. Then again, that is the key to their success. The presence of many ANONYMOUS heavy hitters on these web sites who post and cross-post is essential to maintaining the free flow of information.
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