Another day, another incredibly questionable Wall Street practice. And this one is particularly galling.

Basically, some of the stock exchanges allow companies to see trades 3 milliseconds before they hit the market. It’s called “flash” trading, and the only folks who can take advantage of such information are the ones who pay a fee (of course) and have computers powerful enough to parse the data and make automatic trades of their own before the first trades hit the market.

From NY Times:

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

Now, the exchanges that take part in this practice argue that it’s about transparency, but who are they kidding? Showing a trade for 3 milliseconds only allows a computer to check it out and I think it’s pretty obvious what this was always intended to do. You think investment firms were calling for this information for a long time because they had powerful automatic trading algorithms developed that could utilize the data? Naw…

Understandably, people are saying “WTF?” and Chuck Schumer is already calling for a ban

Senator Charles E. Schumer, the New York Democrat who is chairman of the Senate rules and administration committee, said in a letter to the S.E.C. Mr. Schumer wrote that he intended to introduce legislation barring the technique, if the agency failed to act.

“The hallmark of our markets are that they are open and above board and the little guy has as much of a chance as the big guy,” Mr. Schumer said in an interview. “This takes a dagger to the heart of that concept.”

Do know that this is BIG business and is said to be part of the reason why we’ve seen a 164% bump in the trading volume since 2005 and one of the reasons why a firm like Goldman Sachs continues to post profits during the downturn. In fact, firms that take part in this practice made $21 billion in profits in 2008 and high frequency trades accounted for half of their transactions.

More as it develops…

Technology The Legalized Theft That Is High Frequency Trading