Flash And Dash

• Posted by Adam Warner
• on August 12th, 2009

Lots of good feedback in the comments yesterday inre the Options Flashers.

The thought is that Flashers can pick off calls (or puts) under parity. I would add that they can also snap reverse/conversions into line (a call/put combo on the same line that they can arb against the stock).

Here’s the problem with all that. This sort of trading has gone on forever, whatever the technology. I spent 13.5 years as a market maker on the AMEX. As technology improved, the ability for someone outside the marketplace to “pick off” stale markets improved as well. It’s just the song, different speed.

But unless there’s a real order or orders out there, all they’ll do is move the quotes into line. A market maker/specialist does not have to fill an order initiated by another professional. Or if he does agree to fills for anyone, he will not do it in any important size.

Now I imagine a “flash” machine can get customer status. And I also imagine they take advantage of penny-wide markets that aren’t seemingly out of line unless you know the stock is trading at a different price than the board says. So a lightning quick machine will pick up some cheese here and there.

But net/net, improved technology, not to mention multiple exchanges trading the same products, has helped the real public customer. In fact that’s why there’s only a fraction of the quantity of floor traders as there was a decade ago. Instant information and execution and very tight spreads do serve to level the playing field. Not even it out of course, it will never be even, but closer than it was.

So yes, I’m sure some abuses go on. But I’ll almost guarantee the abuses with *less* automation dwarf the current one’s from the perspective of the average investor.

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