Flash trading is a practice of giving some stock traders an advantage over normal investors for a fee. The way it works is as follows, for a fee brokerage firms will allow traders a thirty-millisecond advantage by allowing them to see the trades before the general public does. With the help of supercomputers running computerized trading programs, they can make large profits by employing high-frequency trading. Therefore, even if the margin is small the profits are substantial.
This front running practice is clearly unethical. It is similar to insider trading and there have been proposals to ban this practice, however, on the direct edge exchange, you can still flash trade. At this point, most firms have voluntarily dropped this practice for fear of punishment.
Flash trading was brought to light by the blog Zero Hedge, run largely by Dan Ivandjiiski, who himself has a lifetime ban on insider trading. Ivandjiiski accused Goldman Sachs of flash trading to amasses unusual economic profits. In fact, many people believe that Goldman Sachs is largely responsible for the economic problems in the USA.
Why Flash trading is wrong
Equity capital is bought and sold on speculation with information that is not free and open information. This makes it a form of insider information. It creates market instability and a concentration of power and wealth not connected with any productive economic endeavor.
Economic profits need to be connected with value-added productivity. I think I am a little Adam Smithian in my view of the world. When someone creates something of value, they are rewarded.
Senator Charles Schumer has called on the S.E.C. to ban this flash trading on the New York exchanges and with Forex.
How to flash trade
I highly recommend not even thinking about flash trading as it is for the big boys and people who want to risk regulatory punishment. If you want to trade stocks and get an advantage over the next guy, do something that the other guy is not doing.
- Read a book by Stan Weinstein about profiting in a bull and bear market.
- Follow stock traders like Jim Jubek.
- Develop your own philosophy of investing that does not include being a flash trader. If you really believe it works consider leverage with options, but only if you really know what you are doing.
- Find a company that other people do not know about. This is better than flash trading.
For example, I live in Poland and know about stocks in Eastern Europe that are not fully appreciated in the US market. This is not insider information, just I have an advantage because I speak the language and I can analysis things the average investor can not. Find your advantage ethically.
Remember the movie Wall Street? It is all the same, some guys think they are too smart and want to break ethical rules. I believe in playing fair in the stock market even if it is not illegal to do something does not mean it will not come back to haunt you later. Ask yourself the question does ethical investing work?
Ask yourself the question what is the pursuit of wealth about? It is a moral and ethical question before it is a financial one. Money is a store of value and if you can not find some way to identify or create value, then it will be hard to make money in an ethical way. Trading is good as it allows the market to value assets, but not super high-frequency trading based on insider information, which is unethical.