Is SEC Regulation of "Flash Trading" a Sure Bet?

According to Senator Schumer's (D) of New York and the Security and Exchange commissioner an outright ban will be legislated in Congress or at least their will be new regulations enacted upon traders and companies that take part in "Flash Trading". According to Senator Schumer an outright ban of "Flash Trading is "imminent."

What is this Wall Street crisis about? Why should main street care about "Flash Trading" Let us review what "high-frequency trading" (HFT) is. Certain companies and traders utilize a super fast computer trading system. That computer trading system works on secret algorithm formulas and computer code.

Out of the 20,000 traders on Wall Street only 2% are using the (HFT) trading system. However, on any given trading day those (HFT) trading system is now making up some 46% of the total trading volume. NASDAQ started to offer (HFT) trading in June of 2009. The way the companies and traders make money is the following; Traders will "Ping" other traders that have similar trades in the system. The traders will push the stock price that is the difference between the Ask and Bid price to the limit. The (SEC) Security and Exchange commission allows a ½ second time period before the stock price is public. Traders will make their money on the difference of the bid and ask stock price. In some circumstances traders will put 100 orders' in and cancel 99 out of that 100.

If 2% of the companies and traders decided to not trade on the market for a day, can you imagine? The negative effect it would have on Wall Street's daily trading volume. Let us look at what would happen to once company on Wall Street if "Flash trading" all put a sell order in at the same time. It would be catastrophic for that company.

How did this "Flash trading" develop over the years? In 1998 the Security and Exchange Commission (SEC) allowed electronic communication networks (ECN's) to participate in the stock market trading. The (ECN's) decided to capitalize and focus on offering traders and Companies rebates that placed their trades with them. By trading in small cap price stocks, those companies figured that they could earn a profit by buying and sell those stocks at the same price and then pocket the rebate for themselves

A second influencing factor occurred in the year 2000. The (SEC) decided to allow the trading of stocks in penny increments. That allowed the traders to make profits from the Ask and bid price of those stocks.

Since 2005 the daily trading volume on the New York stock exchange has increase some 164% since the introduction of "Flash trading". Those companies and traders who utilize "Flash trading" system has a huge advantage over the retail stock trader and the general public. As a further example the (NYSE) Euro next has decided not to utilize the "Flash Trading". The end result for the (NYSE) Euro next has lost about 30% of its trading volume.

The "Flash trading" company Direct Edge Holding LLC. Has been the beneficiary of the increase in trading volume. At the time of this writing Direct Edge Holding LLC has captured about 11.2% of the total US stock trades.

Any financial instrument that controls about 46% of the daily trading volume on Wall Street will have a deep impact on Main Street. The idea that Wall Street can monitor itself without government regulations, is like hiring wolf's to guard the hen house. The public trust is paramount in an open and transparent Wall Street.

The out right banning of "Flash trading" as proposed by Senator Schumer of NY (D) will not pass. However you will see more increased rules in regulation over that industry. We on main street can only hope that Congress and the (SEC) oversight abilities has improved since the Madoff fiasco.