Dark Pools and Difference between Flash Trading and Front Running?

E

epione

Hi,

I am currently working on the issue about High Frequency Trading and of course came across Flash Trading which is very often confused with HFT.

While I understand, that Flash Trading means to sent orders in roughly 300microseconds, before low-latency traders have settled their orders, I am not quite sure that I understand the difference to Front Running.

Is it that Front Running refers only to own (insider knowledge) clients that give you order and Flash Trading to any orders in the market?

I am also confused about Dark Pools. Why should they be regulated, if they "protect" low-latency traders, as no order-details are disclosed and High frequency trader can't get a benefit of it?

I would appreciate if someone could help me on these two questions.

Thank you!
 
Quote from epione:

Hi,

I am currently working on the issue about High Frequency Trading and of course came across Flash Trading which is very often confused with HFT.

While I understand, that Flash Trading means to sent orders in roughly 300microseconds, before low-latency traders have settled their orders, I am not quite sure that I understand the difference to Front Running.

Is it that Front Running refers only to own (insider knowledge) clients that give you order and Flash Trading to any orders in the market?

I am also confused about Dark Pools. Why should they be regulated, if they "protect" low-latency traders, as no order-details are disclosed and High frequency trader can't get a benefit of it?

I would appreciate if someone could help me on these two questions.

Thank you!
More...

Front running, taken literally, refers to a broker who breaches the duty to his own client. Flash trading is potentially the same idea though - it's possible for a third party to see the order flow and step in front of it. Used loosely, the term front running describes them both.

As far as dark pools - are you sure they protect low-latency traders? I didn't think that was the case. Instead, I thought that a lot of the liquidity from the market left to go play in the dark pools instead, where they can step in front of orders all day. I admit that I don't know a whole lot about dark pools, though
 
Sorry, you are right. I ment that Dark Pools should protect HIGH-latency orders, because these orders (I think) can not be flashed. Or maybe I am just not getting the real advantage of it.

When I was enhancing my research I came across "Liquidity Detection": this is when Firms are looking to decipher whethre there are large ordres existing in a matching engine by sendin out small order, or pinging to look for where large orders might be resting. When a small order is filled quickly, there is likely to be a large order behindet it.

Therefore, I was wondering is Flash Trading = Liquidity Detection?

I would appreciate any help!

Cheers
 
Dark pools are just matching orders for big boys that do not have to be publicly displayed. I am pretty sure though it still flashes on the tape.

Mostly an institutional game.
 
For both sides of the HFT/Flash argument see here:

http://www.themistrading.com/articl..._--_Latency_Arbitrage_--_December_4__2009.pdf

and here:

http://fridayinvegas.blogspot.com/2009/07/we-fear-what-we-dont-understand.html

Both sides have valid points. Personally I don't have a problem with HFT per se, I think of it as market making evolved for the electronic age. Flash, on the other hand, while not front-running in and of itself, certainly invites it. As a daily participant in the equity markets, I do believe Flash is being used improperly to front-run and therefore should be banned. My conclusion here is based on my first-hand experience. Latency arb/co-location is a stickier question and I'm not sure where I stand on it yet.
 
Thank you guys!!!

Am I right that Flash Trading is currently still legal on the NYSE??

As far as I know the SEC only proposed suggestions on Sep 17th to alter the exception in Rule 602 of Regulation in NMS (from 1978).. but has not implement any change yet.

.. and as far as I understood Flash Trading and also Liqidity Rebates are not taking place on the LSE.
 
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