August 19, 2009

Flash orders and high frequency trading have become hot topics in the media lately, so what does Seth Merrin, founder and CEO of Liquidnet Holdings, operator of the largest buy-side only dark pool, think these trends mean for the institutional investor?

While high frequency trading as a category has its pros and cons, like all trading, but flash orders have absolutely no pros, says Merrin, an advocate of the institutional investor.

“This is an example where again— typical of Wall Street— there are a few that benefit at the expense of many,” says Merrin in an exclusive video interview with Advanced Trading in his midtown Manhattan headquarters.

“Whenever there is a crack in the armor or someplace where you can make a lot of money, Wall Street figures it out very quickly and that’s where they go,” said Merrin.

While flash orders are used to give a sneak peak at order flow to participants on a private network so they can match a trade before routing out to a public market, Merrin says this is no different than an institution giving an order to a broker and finding out that the broker relayed the order to different hedge funds. “What would you do with that broker?” asked Merrin.

“The problem is with three-or-four of the major ECNs and exchanges offering flash orders, there’s no way for way to avoid it,” says Merrin, referring to The Nasdaq Stock Market, BATS Exchange and Direct Edge. (Two of the three, Nasdaq and BATS Exchange, have volunteered to stop the practice by Sept. 1st). “The entire market became toxic for institutions,” contended Merrin. Flash orders are not so bad for retail investors who have100 shares to buy or sell, but it’s the institution with a million-share order to buy that is affected worse. “Billions of shares are being shown to these third parties and they don’t know who they are and they certainly don’t know what they are investing in,” asserts Merrin.