Flash Orders Harm Displayed Limit Orders

Harm to Customer Orders that Set the Best Price but Are not Executed

“We believe flash mechanisms impose costs on customers because a customer can “miss the market” when its marketable order is converted to a flash order, rather than being routed to the displayed best price. In addition, a customer is harmed when its displayed order at the national best bid or offer is not executed because market makers on another exchange step up to match that best price through a flash mechanism. The supposed cost savings to customers that has been noted by other commenters does not take into account the customers on other exchanges who did not trade because of market maker step ups in flash mechanisms.”  http://sec.gov/comments/s7-21-09/s72109-161.pdf

 We didn’t write the above. It was written by GETCO in a comment letter to the SEC dated 9/29/10 about Flash Orders.  Almost 1 ½ years after the flash order controversy began, the SEC has still not banned them. These orders are harming investors but you would never know it because “there are no studies” that show this.  This is a famous HFT defense.  In fact, its right behind the “we add liquidity” and “we shrink spreads” argument.  The HFT crowd always likes to hold themselves high up  on their academic pillar and hide behind the fact that there are no studies that prove there is anything nefarious going on. Well, sometimes common sense is all that is needed.

As GETCO stated, flash orders harm customers two ways:  their orders are traded ahead of after they are flashed AND their displayed limit orders are not executed because a “market maker” decided to give meaningless price improvement to step ahead of the order.

But why should you care, after all isn’t it “just a few pennies”?  These “pennies” are costing the market in more than ways that we can quantify.  Investors knows that they are being taken advantage of and they have lost confidence in the market.