What is Flash Trading?

Flash trading is a type of trading that makes use of technology to view pending orders placed by other traders faster than investors using more traditional methods. While this approach may only provide access to the activity a split second ahead of others, even that small window can make a huge difference when it comes to placing and executing a trade. For this reason, there is some amount of controversy regarding this type of trading strategy, with critics noting that flash trading could constitute an unfair advantage for a select few in the marketplace.

The actual process of flash trading involves the issuance of what is known as a flash order. Sometimes known as step-up orders or pre-routing orders, flash orders are created after the investor has obtained market intelligence a fraction of a second ahead of most other investors participating in a given stock market. At that point, an order is placed and quickly distributed or flashed to others that are connected with a proprietary data feed, allowing those investors to participate in the trade order. When successful, flash trading can make use of the advance intelligence to avoid considerable losses while posting significant gains, simply because of the timing of the order placement.

The concept of flash trading has been around since the 1970s, when the idea of using the emerging computer technology to mimic the usual activity on stock market floor. This included attempting to create an electronic version of the way that investors closest to the display panels would often catch sight of changes on various stock options split seconds before other traders at the marketplace. By doing so, investors who were not physically present at the marketplace could also have the chance to receive data just before the majority of traders, and act on that information to best advantage.

At present, there are no real restrictions in place to prevent flash trading from being used as an investment tool. Concerns about the practice undermining the ability of investors in general to have equal footing in the marketplace are sometimes refuted by noting that the very nature of the stock market always meant that those who were in a better position to see what was happening in the marketplace as it happened were free to use that advantage to further their interests. Proponents of flash trading note that the use of computer technology to feed data faster to end users broadens the number of investors who can receive and use the market information quicker, rather than allowing it to remain the province of a much smaller group that are actually trading on the market floor.