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Have there been any responses from the mathematics community regarding flash trading, for example from a game theory or system dynamics point of view? Please answer with personal comments or references.

According to Wikipedia: "Flash trading is a controversial practice of some financial exchanges whereby certain customers are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. With this very slight advance notice of market conditions, traders with access to extremely powerful computers can conduct rapid statistical analysis of the changing market state and carry out high-frequency trading ahead of the public market.[1]

Critics of the practice contend this creates a two-tiered market in which a certain class of traders can unfairly exploit others, akin to front running.[2] Exchanges claim that the procedure benefits all traders by creating more market liquidity and the opportunity for price improvement."

http://en.wikipedia.org/wiki/Flash_trading

http://www.nytimes.com/2009/07/24/business/24trading.html

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closed as not constructive by Scott Morrison Jun 7 '10 at 3:31

As it currently stands, this question is not a good fit for our Q&A format. We expect answers to be supported by facts, references, or expertise, but this question will likely solicit debate, arguments, polling, or extended discussion. If you feel that this question can be improved and possibly reopened, visit the help center for guidance.If this question can be reworded to fit the rules in the help center, please edit the question.

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This question borders on being very discussiony. MO tends to prefer questions with "correct answers", whereas you have specifically asked for "responses" and "personal comments". –  Theo Johnson-Freyd Jun 5 '10 at 17:07
    
Sorry, it's an interesting question, but this is the wrong forum for it. c.f. Theo's remarks. –  Scott Morrison Jun 7 '10 at 3:31
    
Well, I was interested in formal reasoning concerning multi-tier games with layered hidden information, and whether or not there have been any attempts at modeling flash and high-frequency trading from such a game-theoretical perspective. Also, I thought it would be interesting to hear if anyone was working on similar analysis from a system dynamics point of view, with a view to understanding the impact on system stability and tendency to develop chaotic behavior. –  Halfdan Faber Jun 9 '10 at 14:03
    
My preference was for direct references to ongoing mathematical research. In the absence of such references, I would have welcomed any comments rooted in formal mathematical reasoning.From the lack of qualified responses it appears that there may not be a lot of research interest in this, or indeed general interest in the community. –  Halfdan Faber Jun 9 '10 at 14:04
    
There is a new promising forum where this question would fit: quant.stackexchange.com –  vonjd Feb 9 '11 at 13:27
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1 Answer 1

I don't believe there are many academic mathematicians who will be familiar with the nuances of stock exchange networks, so probably not the best MO question. That said, both the wikipedia and NYT article are gross oversimplifications of flash trading and have very misleading statements. For more informed (if biased) opinions, why don't you start with http://online.wsj.com/article/SB10001424052970203706604574374431720968204.html?mod=googlenews_wsj

http://fridayinvegas.blogspot.com/2009/09/you-really-shouldnt-care-so-much-about.html

The informed arguments against flash trading are usually about it being anticompetitive among networks, and not game-theoretic.

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