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May 1, 2013

High-Speed Traders Exploit Loophole

High-speed traders are using a hidden facet of the Chicago Mercantile Exchange‘s computer system to trade on the direction of the futures market before other investors get the same information.

Using powerful computers, high-speed traders are trying to profit from their ability to detect when their own orders for certain commodities are executed a fraction of a second before the rest of the market sees that data, traders say.

The advantage often is just one to 10 milliseconds, according to people familiar with the matter and trading records reviewed by The Wall Street Journal. But that is plenty of time for computer-driven traders, who say they can structure their orders so that the confirmations tip which direction prices for crude oil, corn and other commodities are moving. A millisecond is one-thousandth of a second.

The ability to exploit such small time gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.”

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Read full Wall Street Journal article here

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