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On Flash Trading

In this letter appearing in today’s Wall Street Journal, Chris Hynes and Donald Luskin explain why government should not prevent “flash trading”:

We are replying to Sen. Chuck Schumer’s Sept. 4 letter concerning our Aug. 27 op-ed, “In Defense of ‘Flash’ Trading.”

Sen. Schumer makes the incendiary charge that flash trading “seriously undermines market integrity” by leading to front-running. If it did, then no trader in his right mind would ever enter a flash order, because he would be the first to be victimized. Flash trading is, in fact, a solution to front-running that improves market integrity.

An institutional trader with a million-share order never puts the entire order into the market all at once, for fear of market impact. Typically, a succession of smaller orders is placed in various markets, and at any given time the bulk of the order is not revealed. So of necessity, all other market participants are at an information disadvantage to the trader with the large order. Yet if he puts his entire order into the market at once—say, to buy one million shares—other traders would run ahead of the order by bidding higher prices. Their bids would mask the million-share order, and sellers would only see the smaller, higher bids, and be enticed to sell, not realizing a huge buyer lurked.

To protect against such front-running, traders typically withhold information about their own trading intentions, and there is nothing wrong with that any more than there is in keeping your cards close to your vest when playing poker. New trading technologies such as flash orders and “dark reserve” orders on the New York Stock Exchange—a limit order that is not displayed, to which apparently Sen. Schumer has no objection—are ways of accomplishing this.

Customers, not senators, should decide which of the many new trading technologies they wish to use. If Sen. Schumer is sincerely interested in promoting fairness and liquidity, we suggest he train his fire on the proposals currently being floated in the House of Representatives to impose an 0.25% tax on securities transactions.

Chris Hynes

Edwards, Colo.

Donald L. Luskin

Menlo Park, Calif.


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