In a Flash

When the press is on the ball and regulators regulate, you get results

That didn’t take long.

The SEC is “considering a ban” or going to “push to eliminate” or “move to ban” so-called flash trading, depending on which major press outlet you want to believe. Flash trades allow powerful traders to get sneak peeks at others’ stock orders for a split second, long enough for their computers to take advantage of the information. The move comes after Sen. Chuck Schumer, no enemy of Wall street he, started squawking about legislation to end the practice.

The New York Times’s Charles Duhigg, whose July 24 story put the flash-trading issue front and center (after Zero Hedge and Reuters’s Matthew Goldstein put it on the table), is responsible for the “push to eliminate” language mentioned above.

He writes point-blank about the abuses of not just flash trading, which is a small subset of the larger high-frequency trading issue:

Stock exchanges say that more than half of all trades are now executed by just a handful of high-frequency traders, who use rapid-fire computers to essentially force slower investors to give up profits, then disappear before anyone knows what happened.

That’s a strong statement about what high-frequency trading is. I don’t think I’m comfortable with such a one-sided assessment on something that’s still up for debate. But flash trading is not. Even the stock exchanges say it’s unfair.

The Wall Street Journal’s story—responsible for the hedged “considering a ban” language above—is he said/she said all the way.

Critics say flash orders give a select group of high-speed traders a window into the direction of the market, giving them the ability to trade at lightning speeds ahead of less fleet-footed investors. Flash-order advocates say the orders help traders get better prices. They say a ban could cause trading volume to drop on the exchanges that permit flash as traders look for better execution in alternative, less-transparent venues.

The WSJ ends its story with six paragraphs on Direct Edge, a trading platform that helped popularize flash trades and which unsurprisingly says flash trading is just fine:

William O’Brien, chief executive of Direct Edge, makes no apologies for the practice, saying flash has gotten investors better prices on larger orders roughly 10% to 15% of the time. Other times, he says, there isn’t an impact on prices.

O’Brien tells the Journal Direct Edge will be okay even if flash trading is banned—which has the effect of making him seem less biased. And the Journal doesn’t question his assertion.

Which brings me to Bloomberg, issuer of the “move to ban” language above. Its lede contradicts the Journal’s kicker:

The U.S. Securities and Exchange Commission’s move to ban so-called flash orders may help NYSE Euronext take back market share of U.S. stock trading at the expense of three-year-old rival Direct Edge Holdings LLC…

“In the short-term, most of the negative impact will fall on a player like Direct Edge,” said Sang Lee, managing partner at financial-services consultant Aite Group LLC in Boston. “If they decide to ban this altogether, there would be an impact.”


The other interesting part of the SEC story is that it’s making rumblings about regulating “dark pools,” off-exchange trading where people can make trades without leaving footprints, which raises obvious questions.

The Times notes that can allow big mutual funds trying to get out of a large position in a stock without tipping off the overall market to what it’s doing. But I don’t see what that’s enough of a good thing to allow segregated, big-boys-only traders to play in their own sandboxes, especially if their participants get material information before everybody else.

But some dark pools are open only to select investors. And they often give participants quick peeks at orders before they are filled, offering valuable insight on how prices are likely to shift once the transaction is announced.

I expect we’ll see more about dark pools in the coming days.

But regarding flash trading: This is what happens when the financial press is on the ball and when we have regulators who actually believe in, you know, regulation rather than implementing the will of their corporate pals. This is swift action to correct wrongdoing. It wouldn’t have happened—at least nearly as quickly—without the work of a blogger taken to the next level by the press.

But the high-frequency trading story isn’t over. Flash trades and dark pools are the low-hanging fruit. We need a full exploration by the financial press and regulators of the implications of automated trading generally.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.