For much of Wall Street’s history, stock trading was pretty straightforward. Sellers and purchasers would meet on exchange floors and bargain until they struck a deal. However in 1998 things changed, and rather quickly as the S.E.C. authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intended outcome was to open markets to anyone with a desktop computer looking to invest cash and be in control of their own destiny to a degree.
However as new marketplaces continue to emerge such as the Edge exchange which recently got approval in March, the home desktop PC has been unable to keep pace with Wall Street’s computers and technology. Incredibly Powerful algorithms continuously execute millions of orders a second and can scan dozens of public and private markets continuously and simultaneously. These algorithms can spot trends in less than the blink of an eye; long before the average investor, quickly and deliberately changing orders and strategies within milliseconds for institutions and funds.
It is exactly for this reason that on Aug. 4 2009, Mary Schapiro said she asked the S.E.C. to devise an approach that could be quickly implemented to eliminate the inequity that results from flash orders. Proposed rule changes would require approval from the S.E.C.’s commissioners after a review of public comment. But several investors who frequently engage in high frequency trading, almost too quickly made it known they did not expect the S.E.C.’s rules to greatly affect their profit. Their comments were pretty telling, as they made statements like “We move faster, smarter and understand risks better than other investors”, as well as this little tidbit “profits have always flowed to whoever dominates the marketplace, and we have a technological advantage that it costs millions to match.” Call me crazy, but that sounds an awful lot like we have the financial resources to cheat everyone and manipulate the trading to our unfair advantage; but you can decide for yourself.
Here is a basic understanding of how flash trading works. Flash trading involves the use of powerful high speed computers to gain a trading advantage measured in fractions of a second. The process unfolds when a firm that is seeking to buy or sell shares of stock posts the information only on a specific stock exchange before sending the trade information out the broader public markets and making it available to all potential investors. If a deal can be struck between recipients of the flash trade (the firm and the specific exchange), the result is a locked market with guaranteed pricing on the order. On some trades, it also results in better profits for the firms making the trades, firms regularly get discounts/ rebates / lower transaction fees for flash trades when the deal is completed on the home exchange and doesn’t get posted on competing stock exchanges. The maximum time delay is 500 milliseconds before the trade must be executed, canceled or made available on rival exchanges. However the average time delay is just 30 milliseconds. Can you say warp speed? To average retail investors, these times are so incredibly fast they are unimaginable and meaningless. To flash traders using high speed computers, 30 milliseconds is more than enough time to make a private market for securities and rack up serious profits without a violation of the Quote Rule, which requires broad and public availability and access to bids and offers. If you have been involved with Sirius XM common stock at all over the course of the last 3 years or more, I am sure a light is going on in your head right about now.
Flash trading began more than a decade ago when the Chicago Board Options Exchange (CBOE) began using it according to their reasoning as a way to improve the speed of trade execution. In 2006 Direct Edge began to employ the practice of flash trading on its trading platform, thus the beginning of broader deployment. Direct Edge expeditiously captured increased market share from rivals as their share of matched trades soared from 1% of the industry’s volume to 12%. They quickly became one of the top three largest stock trading platforms in the country based on the volume of trades they handled. The success Direct Edge had spurred other firms to adopt flash trading in order to stay competitive.
Spurred by their success, Direct Edge put forth an application to become an official stock exchange. The approval was granted to them earlier this year as mentioned earlier in the article. Seeing increased competition, NYSE Euronext and market making firm GETCO voiced their opposition loudly and publicly about flash trading. They sent their complaints to the Securities and Exchange Commission (SEC) and were joined by New York Senator Charles Schumer who also wrote to the SEC. The response was SEC Chair Mary Schapiro ready to ban the practice. The increased spotlight and regulatory scrutiny convinced several firms, including Nasdaq OMX Group and Bats Global Markets, to ban their brokers from engaging in flash trading. Unfortunately the reality of the situation is that competition and rivalry among Wall Street firms is the only reason that flash trading is getting any attention at the government level at all.
Nasdaq and Bats finally relented and introduced flash trading themselves. For BATS, offering flash orders, which it calls BOLT orders, was also a business decision. “We’re going down the path we are because the SEC has said it’s legal,” said Joe Ratterman, CEO of BATS. “If they authorize other firms to employ similar programs, BATS doesn’t want to be left at a disadvantage based on market structures other venues may use.” A pretty telling comment, basically, if you can’t beat the cheats join them. To that end, I really have a hard time understanding why the SEC has seemingly appeared to drag their feet with this issue. To me, it all seems to be the same story, money talks; we need only look back to the OJ Simpson trial for the proof of that. It always has and it always will, just with different technology. That being said, it is best to know your enemy and his tendencies before going to battle, and a well informed investor in Sirius XM or any other company is by far better off, than an uninformed one.
Disclosure: Currently hold a long position in Sirius XM
Great article Steve. Thank you.
I am sending my resume to Goldman Sachs today.
Flash Trading is no different than Front Running – which has long been outlawed on reputable exchanges and by the SEC. Just because this Front Running is now being done in milliseconds does not make it right and it certainly should not make it legal. Couple this with Naked Shorting and exceptions that permit prolonged Fails to Deliver and you have a real prescription for unbridled manipulation of the markets and abusive trading. It’s no wonder investors have lost confidence in the integrity of the markets and believe the SEC is way behind the curve in terms of effectively policing all of this. It’s also no wonder that the SEC still does not have a clue about what really happened on the day of the Flash Crash (May 6) – which firms orchestrated and profited from this event – and how to prevent a repeat performance in the future.
the real problem is, of course, not that the SEC is so far behind …it is that the SEC is creating laws to FACILITATE stealing citizens. Make no mistake, the job security at the SEC demands complicity with whatever goldman wants, and whatever wallst needs to steal ….we are speaking of an entity whos sole purpose is to provide fair markets …..and every single active tradre knows the market is a COMPLETE farce – they do whatever they please to stocks whenever they please. the simplest of people can observe virtually ANY stock around options expiration and see the ABSOLUTE manipulation fo EVERY single stock in the market …..orchastrated stealing from citizens – ps, the SEC is beginning to see the FIRST of a number of lawsuits for its complicity in creating/knowing about naked shorting destruction of stocks ….MANY lawsuits against the SEC are beginning to flow …regarding its illegal co-conspirator role
Real nice article and a keeper for quick review of flash trading. As far as anything ever changing, I am not optimistic. You sum it up in two words, Steve…”money talks”…always has and always will. These folks own everybody and nothing can change until the shackles can be broken…just don’t know how that will happen…
Nice article Steve,this describes the unfair ethically but Legal practice of flashtrading..so why does everyone who post’s here or any manipulative article written by anyone,still trade or invest in the market?is it because they are still making money but they don’t think it’s enough or could be more? or is it that they are losing money hand over fist and have given up trying?
Look at it this way,before the 401k everyone is a genius in the market mentality took over,most if not all investors put their money with proffessional stock brokers at hefty fees to invest in the market,of course then boiler rooms and inside info ruled the day,so you had to choose experts wisely,but now with 7-9 dollar commissions,stock brokers no longer exist and it’s like everyone is a broker now and well you know the old adage,if a fool,you will be taken,beware the buyer who thinks he’s smarter…JMHO not a solution,just the reality of it..
Sorry irish…..but rigging the bid or ask is not legal…not in a free and fair market….which is what the US stock market is supposed to be right? Staggering greed doesn’t make the exchanges employing flash trading right……what makes them right is the money they spend to ensure they keep the rules under which they operate, to maintain an unfair and unethical advantage not available to the avg investor……there is a term for that….its callled corruption…..and the SEC has a responsibility here….one which they continue to try and avoid by shining a spotlight on everything else. The ole throw enough crap against the wall and sooner or later some of it sticks ploy.
“is not legal” … until it is made illegal, it IS legal and irish’s point is dead on the money.
One of the biggest abuses is the permission of pre-arranged trading between buyers and sellers, as opposed to “arms length” transactions. This pre-arranging amounts to nothing more than “three card monte” – allowing fictitious trades to take place, often at fictitious prices (away from true market levels) – merely to give the illusion of activity and paint the tape with a printed level that is away from real supply and demand. These ficititions “crossing” of trades in pre-arranged fashion are really fraudulent, in my opinion – designed to interfere with accurate supply and demand related trading levels. Pre-arranging of trades should definitely be outlawed by the SEC – but, as noted above – the SEC appears to be in the pocket of the major Wall Street trading firms.
RAF – I 100% agree with your words. To me, that is how SIRI gets drug down every time. How did we go from $1.25 to $0.90 so quickly? Shorts, yes. But these pre-arranged trades, in my mind, play a huge part and help to createa mini panic, causing people to sell their shares.
“as it pertains to SIRI” HUH?????? Misleading headline, to say the least.
you obviously have not followed Sirius Xm much less just about any other heavily traded equity…or you would understand the relevance. Have a good one.
Steve,
Thank you for the effort you put into this piece! There was much here I wasn’t aware of, and thats never a good thing!
Ok, Sheree, how do you put you pic on these replies?
Nice read on flash trades. However, can someone please provide a little more on the SIRI angle for those of us who cannot read between the lines? Thanks!
LONG SIRI
KP,
Do you have any SIRI shares? It appears you do not if you don’t even have an inkling of what is being talked about. Whatt does a rigged bid and a rigged ask mean to you? Suggest you read all the comments posted on this article. If you still have issues after that, feel free to sign into the forums and Private Message me. I will be happy to explain it to you.
I understand the article to simply be about flash trades. Yes, I have a nice position in SIRI that has been averaged into over many years. I am a long term investor, not a day trader. Of course the market is rigged! We all know this which is why we are here. We want in on this advantaged play. What I am specifically asking is why SIRI is singled out here. What is different about SIRI vs. ANY other ticker? That’s all I was saying. Thanks.
KP,
SIRI was just the stock I chose because we all have been subjected to alot of nonsense with this particular equity …which as a long you already know. I could just as easily have made it pertain to C…or AAPL…..or any other high volume stock symbol…hence the other notably manipulated equities part of the title.
I think by specifically putting SIRI in the title you are attempting to manipulate SIRI. I don’t buy your “disclosure.” Good try though. SIRI Shorts will be spanked next month, and the long investors will be soaking it up!
Ok..you’re officially an idiot. Thanks for stopping by. By making people aware of how flash trading affects SIRI……I am attempting to manipulate it…not make people aware of how it is abused by the markets…ok!
The article w/o the mention of SIRI would have been great. However, me thinks the idiot is the one who instead goes out of his way to lose the small audience he has because he can’t properly defend his position or take a question as something other than a personal attack. Get over yourself: You blog on a website with an audience of 4.
guesszoo,
its the equivalent of you walking into a casino and the house has rigged the dice at the craps table in their favor…..but nobody really knows. You think thats legal…more power to you. I realize right now they are operating within legal boundaries and the law…but that doesn’t make it right……and to counter irish…why should exchanges get an unfair advantage…don’t they make enough money on transactions, or are they too greedy?
KP,
How is the air up there…..cold I bet. I don’t care about how many people read what I write. If I help 1…just 1 person better understand what the hell has been going on, I have accomplished something positive. As to the rest of your post…did you think I was going to let you make unfounded accusations..which are 100% WRONG…without striking back. I have no way of “manipulating SIRI”…and not that I owe you any personal information but I do own shares of this company, and I am a market bull generally. As to losing audience….I don’t consider you audience….I consider you a basher….who was pissed he didn’t get the last word when he made silly commentary. I am also willing to bet you hold ZERO shares of SIrius….not that I really give a crap one way or the other. People like you are not difficult to figure out. Your agenda sucks..as well as your quickly made up identity and your phony email address that you probably don’t even remember the password to, which you probably made up to make your comments today. Ok I guess thats enough…have a good evening.
If I help just 1? … too funny. Obviously I upset you, and for that I apologize. You’re wrong on all accounts in your assumptions of me, and when someone’s wrong they sound just like you: unprofessional. Good day.
KP,
What is so funny about trying to help even 1 person get a clearer picture? I don’t think its funny at all. If I am wrong about you I apologize, but calling me a manipulator with this article was way over the top, as was questioning my disclosure, since I don’t have to reveal anything.
asm610
Thanks for the article. Very informative! Don’t waste your time addressing them! That is how they want you to respond!
JS
Thanks Asm, great informative article. You and the team at KOAT have helped me many times with “what” is going on. Thanks for the continued efforts to inform.
I appreciate the article. It shed a little light on flash-trading.
RAFs comments shed even more light for me on what seems troubling:
namely, that two flash traders (or is it one flash trader and their preferred exchange? or just one flash trading firm?) prearrange trades at a certain price to give the illusion of volume and an artificial price. If that price wasn’t really available to me, then that’s one part of the unfairness that sounds like it should be illegal.
If for example I am offering to buy 100 shares of XYZ at 1.00 and a flash trader arranges an execution of a trade of 10,000 shares at 1.05 somehow and my buy doesn’t go through..wait can someone give this kind of example of how someone with a bid or ask already in the queue
gets harmed by a flash trade?
If those trades are designed to mislead people into thinking that a stock’s value has changed, then i understand that as something different. I feel at least partly responsible if i let myself believe other people’s assessments of value (real or fake). Is that mostly what flash trading is about? Creating rises and drops? or is more about milking micro-pennies out of the difference between the bid and ask? or milking rises and falls with minimal risk, because they hold for so short a time and have the inside knowledge that they and their friends are the ones creating/ sustaining the rises and drops?
is asm610 the author of the article (Steve Garcia)?
KP raised valid questions/comments.
The only sentence about SIRI in this article says nothing concrete or informative:
“If you have been involved with Sirius XM common stock at all over the course of the last 3 years or more, I am sure a light is going on in your head right about now.”
The author should definitely clarify what thought he thinks SIRI owners are automatically having and why. THe rest of the article nicely assumes that the reader is interested and reading in order to become better informed. WHy drop that healthy writer’s tone and switch to “You should feel manipulated, but i won’t go the record with that thought or explain why.”
That kind of cop-out at the most key point of the article raises valid concerns about the author’s intention. The unsupported title raises a second redflag to an admittedly skittish crowd of SIRI watchers (invested or not) who do feel like they see the price being manipulated and want to understand how. It’s reasonable to be concerned that maybe this fear is being used once again here in this very article – essentially saying, hey you should sell your shares of this stock because it’s being controlled by flashtraders and you can’t win. It’s just another subtler part of the manipulation that goes on in the investing world.
Demonstrate trust by being open and clear with your thoughts.
-T. Shizz
I honestly hope I help even one person too.
Maybe KP should specify his qualms with that pleasant approach.
I’d guess he fears you’re trying to ‘help’ even one person sell their shares
(aka ‘harm even one’).
okay, i’m putting the coffee down. sorry for the long-windedness
shizz,
Thank you….I definitely see your points having read your comments and then my article again. I am sorry for not being clearer, and have no excuse for that. I took what was over 5000 words and reduced it to just over 1000. I missed something along the way and tried to get the most relevant info into the article. If the signal to this article from me was to sell….then that is definitely the wrong signal I was trying to convey. What I wanted people to realize….is that the bid and ask are not as reliable as some people think relative to actual sentiment, the reasons behind it and that flash trading can fool you into an early sale if you are not aware…..leaving you frustrated and possibly at a loss with your shares. I wanted people to understand why this stock trades as it does…..many times very irrationally.