Defining Investment Jargon: Flash Trades

by The Investment U Research Team

Splashed across the news this week we find out that the Securities and Exchange Commission (SEC) has decided that they will move to ban flash trading. Flash trading allows institutional traders and professional money managers with high speed computerized trading software to see and execute trades a fraction of a second before they go out to the markets. It allows them to buy and sell ahead of the curve.

With computerized trading software, that means hypothetically millions of transactions. The SEC has decided that this practice – which is a widespread and common practice – is unfair to smaller and average investors

Imagine if you had the ability to read the tape at a horserace before everyone else, ala the “Big Chill,” or if you could know a lottery’s numbers before they were called. While flash trading isn’t as severe as these two examples it does give institutions that use them a slight edge.

These companies can see which way the wind in changing to faster than anyone else, and while half a second isn’t enough for a human to react, an automated computer system with learning and market algorithms could exploit this advantage.

And really that’s all flash trading is, an advantage.

When you think of how many institutions and mutual funds that had a dismal 2008 with all of the advantages that money could buy, perhaps that advantage wasn’t that great after all…

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