Saw this headline on on ZeroHedge.com, “Cramer Launches Flash Defense Campaign” http://www.zerohedge.com/article/cramer-launches-flash-defense-campaign At first I thought it had to be a misprint, since almost every major market participant has distanced themselves as far as possible away from flash orders. After the controversy reached a fever pitch in late July, almost every major broker issued letters to their clients saying that they did not participate in flash trading. NASDAQ and BATS voluntarily pulled their versions of flash on August 6th. And even proponents of high frequency trading have recently come out against flash trading.
So, how could Cramer say that flash is no big deal. The CNBC website couldn’t even believe that Cramer was in favor of Flash trading. They wrote , “Believe it or not, Cramer said, “This is actually a part of the market that’s working.” http://www.cnbc.com/id/32915415
So, Cramer says milliseconds don’t matter for the average retail investor. But those milliseconds have contributed to a multibillion dollar high frequency trading industry. This money is not created out of thin air (sorry, Ben Bernanke not in this part of the business). Somebody is losing here. And, the retail investor is one of the losers. Lets look at an example of how they lose that somehow Cramer seems to have failed to mention:
1-The market on XYZ is 21.05 bid for 500 shares, 500 shares offered at 21.08.
2- Say you want to buy 500 shares of XYZ at 21.08. You place a buy order with a $21.08 limit through your online broker .
3- Your broker routes to a market center which utilizes the flash method. Before your order gets routed to the market center which has the $21.08 offer, it is flashed to a subset of market participants.
4- A flash subscriber see this buy order coming and decides to trade in front of it and buy the 500 shares at $21.08 for their own account.
5-You get nothing done and 500 shares trades at $21.08.
6- It is very possible now that another market participant sees this trade and then bids $21.09 for stock. The buyer who took your stock then offers it at $21.10.
7- You are frustrated that you got nothing done and then change your limit to $21.10 and buy the stock.
Some people may say that it is only 2 cents and shouldn’t make a difference. Well, maybe 2 cents isn’t a big deal for this one trade. But do this thousands of time a day and it adds up to real money that is being siphoned away from retail investors.
So, as the retail investor, you were disadvantaged because your broker decided to flash your order. If you don’t know if your order is being flashed, we recommend that you call your broker and ask them. And if you don’t want to be flashed, we recommend that you demand that your broker opt you out of this routing strategy.