Tuesday, August 11, 2009
Flash, Ping or Scrape, it is all Gaming
I was not surprised to see that Nasdaq and BATs (and probably soon Direct Edge?) have voluntarily quit allowing 'flash orders'. There are a number of strategies that are less than strictly kosher - flashing, pinging, scraping - all are a way of gaming displayed and dark liquidity. Algorithms are designed by clever people who know how to tease the teeniest margins out of high frequency trading. The convergence of electronic trading, ECNs, for-profit exchanges, NYSE's hybrid system and Regulation National Market System all contributed to enabling high frequency trading. This is generally a good thing because it bolsters liquidity and keeps the exchanges and ECNs in pocket money. But when it becomes too obvious that the HFTs (as the media seems to insist on labeling them now) are taking advantage of the rest of the investing public, the regulators have to step in. The SEC seems to have grown some cojones finally, thus the rush by Nasdaq and BATs to voluntarily ban flash orders. What the HFTs (and perhaps some of the ECNs, exchanges and dark pools) do not want is for the SEC to look under the rug and see the rest of the story. They are hoping that the ban on flash orders will satisfy the regulators temporarily, so their quants can find some new ways to game the market.