60 Minutes had a story tonight on how flash trading front-runs the markets. When you try to buy something, they buy it in front of you so that the offer is no longer there and you essentially have to pay more to get it if you want it at that moment.
For the last few years I've been seeing this exact same thing and have known it, something that was appearing more and more aggressively in even very small trades. Its had become increasingly difficult to execute trades manually at the advertised bids/offers, particularly obvious in less liquid markets where I've spent most of my time.
Flash traders have always been described as 'arbitrageurs' and 'providing liquidity' which for quite a while has been a generous misconception. This is the first I've heard them actually described publicly as aggressively manipulating the markets.
This was proven by a professional (hedge fund mgr?) who began routing orders in a way that the orders would arrive at each electronic exchange at the same time. He found that his very low execution rates suddenly jumped to roughly 100%, as his orders weren't being front-run anymore.
He then quit his multi-million dollar paying job and founded the IEX exchange, which is an exchange created with the purpose of slowing market participants down so that everyone essentially gets the market information at the same time. It's done by looping the fastest participants through up to miles of fiber optic cable to increase ping/response times, and this process seems to be very effective at evening the playing field.
I found it to be some fascinating sh!t that I expect to hear a lot more about. I find it awesome that these things are out in the open now and solutions to combat the manipulation are being developed and implemented.
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