HFT "Flash" Orders: Nasdaq Admission?
Courtesy of Karl Denninger at The Market Ticker
A Nasdaq spokeswoman said the exchange had no comment beyond a letter Greifeld sent to the SEC on Monday, in which he called for the elimination of "any order types or market structure policies that do not contribute to public price formation and market transparency."
Greifeld’s letter listed "flash orders, internalized orders, enhanced liquidity providers, Block Talk orders, and dark pools," as order types that do not support price formation.
But wait….
The New York Democrat, who has urged the U.S. Securities and Exchange Commission to clamp down on the practice, said parent company Nasdaq OMX is willing to submit to a potential ban by the agency after it "reluctantly" started offering flashes early last month.
Did I just read that correctly? Did Nasdaq OMX tell Chuck Schumer that it intentionally (even if reluctantly) began offering order types that do not contribute to public price formation and market transparency?
That is, did they (perhaps unwittingly) just admit to the true purpose of these order types and their willing participation in same rather than doing what any good steward of a public trust should have done – that is, standing up immediately as soon as this chicanery began and raising hell?
Oh wait – maybe they did:
Nasdaq and rival BATS Exchange started on June 3 "flashing" buy and sell orders to exchange members, including big banks and hedge funds — closely mirroring a service offered by alternative venue Direct Edge, which long offered the service to a smaller group of market participants, and was growing its market share at the exchanges’ expense.
Ah. So now we’re getting to the bottom of this, aren’t we?
See, there are people who like a two-tiered market; broadly they are those institutional traders who really don’t want their interest (to buy or sell) to be made public lest the price move, and then there are those traders who love the idea of being able to get a "look first" sort of view of what’s going on because such a look gives them the opportunity to make a risk-free profit, since they know exactly what will hit the tape before it does.
I assure you that I can make an incredible amount of money at the horse racing track if I’m able to get tomorrow’s newspaper today.
This is exactly what this sort of nonsense allows and that it has gone on for quite some time is an outrage. Whether it is illegal "as currently defined" is not the issue – that it absolutely runs afoul of the intent of front-running laws is indisputable; a trade without risk is not a trade, it is theft from other market participants, irrespective of how much is stolen.
This must stop – in all of its forms – right now.
