Flash Order

A flash order, which is also known as flash trading, is defined by the trade publication known as Traders Magazine as a marketable order that is sent to a market center not quoting the best price in the industry at the time. A flash order can also be sent to a market center that cannot fill the entire order at that moment. Despite Regulation NMS and because of an exception to its Rule 602, flash orders are allowed at this time.

According to Bloomberg, the origin of the flash order goes back to 1978 and the efforts of the exchanges to replicate through technological means how a human trader might yell an order to the brokers on the floor before entering the order into the bidding and offering system. Since the days of floor broker domination, the rule of systems has become complete. Computerized algorithms now buy and sell shares at a rate roughly 1,000 times the speed of a human eye’s blink.

As times have progressed, flash orders have grown in popularity through the options markets. Since as early as 2000, the CBOE or Chicago Board Options Exchange has begun to use this type of order to grow the trade at which trades are executed for its clients.

In the year 2006, a company called Direct Edge began to offer its customers the change to employ flash orders through the equities market. In July of 2010, Direct Edge became an exchange in the U.S. Among other U.S. exchanges, Nasdaq and Bats have also built their own flash market, beginning in 2009 to challenge Direct Edge. However, neither maintained their exchange for long, discontinuing it in August of 2009.

As Direct Edge responded to the data that market impact is reduced by flash trading, they have also observed that flash trading has grown the sizes of average executed orders and reduced trading latency. Beyond these changes, flash trading has also created additional liquidity. Through allowing the subscriber base to determine whether they want their orders participating in flash or not, Direct Edge has given brokers the option of choosing to use flash orders or not. Direct Edge believes that the purported controversy over flash trading is overblown, saying that misconceptions have stirred a generally passionate but poorly informed debate regarding flash technology.

However, there are numerous critics to flash trading. These critics believe that flash trading has built a two tiered market wherein one class of traders is able to exploit another class in the same way as front running. As a rule, the exchanges maintain that all traders benefit from flash trading due to the resultant growth in market liquidity and the additional growth in price movement. According to a December 2009 article from The Banker, an attempt to further fuel controversy and contribute to a debate that does not exist, many commentators and pundits have bitterly complained that flash trading exposes information that could allow some traders to front run orders to benefit themselves unfairly. However, The Banker also mentions that a widespread perception is that flash orders are a preserve maintained by overly sophisticated high frequency traders has further grown the unfortunate impression that lay retail investors are being cheated.

According to Direct Edge, the response to the two tiered market impression is that it is supremely difficult to address every concern that can result from empirical data. Beyond what empirical data suggests, flash technology democratizes the access to what is not displayed in the market. As a result, flash trading removes the tiers that typically characterize market access.