FLASH TRADING AND PREDATORY CAPITALISM. Dick Weisfelder forwarded to me a New York Times article about “flash trading”, under the caption “FW: update on predatory capitalism.” (Sorry, no link. I am having more and more trouble linking to New York Times articles, and I can’t link to this one.) I had not heard of flash trading. It has been in the news this week so I have picked up some data from the Financial Times and the Wall Street Journal, as well as the Times. I am astonished by the numbers. Flash trading is a small subset of what is called “high-frequency” trading, in which computers carry out a transaction in 400 microseconds. (A microsecond is one millionth of a second!) These “high-frequency” trades now account for over half of the daily volume in stock trades. There has been an effect on the size of trades. As I recall, back in the day (forty years ago), large block trades in the tens or hundreds of thousands of shares of stock were given special treatment and lower commission rates. Small trades were undesirable. “Odd lots” —trades of less than 100 shares—had to pay a higher commission. Now, computers break orders into tiny slices and the average trade has fallen to 250 shares. “Flash trading” constitutes less than 3% of all trades, but it has been increasing rapidly. Flash trading involves given some traders early knowledge of some offers. The time advantage is 30 milliseconds—or 30,000 microseconds. Are the flash traders being given an unfair advantage when they have 30,000 microseconds before the order is shown to everybody? The chairman of the SEC asked her staff this week to develop a proposal to “eliminate the inequity that results from flash orders.” I think Dick was asking for a response when he referenced “predatory capitalism”, and I will give him some thoughts tomorrow.
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The article was forwarded to me with that caption. It’s not mine, though it seems to characterize the practice correctly