Let's say that among all the exchanges, the highest bid for stock
XYZ is 10, and the lowest offer is 10.5. Bob enters a flash order to
buy 500 shares in between, at 10.25. This order exists in Direct Edge's
system for mere milliseconds, but in that time the high-speed computers
of other participants might decide to sell Bob the 500 shares he wants
to buy. So Bob gets a price better than the best offer, and the seller
gets a price better than the best bid. If a trade can't be executed,
then Bob can try other markets.
In this example, because the flash trade comes in between the best
bid and the best offer, it does not contribute to market volatility.
Buyer and seller have entered into a trade in which they both feel they
have achieved the best possible deal, or they wouldn't have traded. And
the flash order created an opportunity for new liquidity to enter the
Flash trading is like offering to sell your house to your neighbor
before you officially put it into the real estate listings. For that
matter, it's just like what upstairs traders did in the pre-computer
era: shopping an order before sending it to the exchange floor. We had
no problem with this process, so why would we ban flash trading, which
simply makes it more formal and produces an audit trail that the
upstairs traders didn't?