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Are Pros Given Unfair Advantage Over Retail Investors?

Wonder why your returns don’t look like the pros? Turns out they may have an unfair advantage.

So unfair, that Senator Charles Schumer (D-NY) warned that if the SEC doesn’t take action, he will – in Congress.

Specifically, Schumer is demanding that the SEC ban so-called "flashes" -- orders that stock exchanges send to a select group of traders before revealing them to the wider market.

In a letter dated Friday to SEC chair Mary Schapiro, Senator Schumer said this type of high frequency trading "seriously compromises the integrity of our markets and creates a two-tiered system where a privileged group of insiders receives preferential treatment."

"If the SEC fails to curb this practice, I plan to introduce legislation in the U.S. Senate to prohibit the use of flash orders," the letter said.

According to Reuters, at issue are buy and sell orders that the Nasdaq Stock Market and BATS Exchange began "flashing" early last month to market members, including the big broker-dealers, before they are routed elsewhere to all participants.The flashes -- which last for fractions of a second -- allow computer programs to respond.

Although delaying information for only fractions of a second may seem like an absurdly short amount of time to a retail investor, high frequency pros can make their move in just 0.03 seconds!

And “although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds,” explains the New York Times which first broke the story.

"In recent years, some of the largest financial companies, including Goldman Sachs, have earned enormous profits with such computers, which are very expensive and often housed right next to the machines that power the marketplaces themselves," says the Times.

As of Tuesday evening, SEC chief Mary Schapiro had not responding to Sen. Schumer’s demands. But, according to the New York Times, some members of the SEC “acknowledged they were investigating the technique and expected new regulations to be issued by this fall.”

Although there's nothing illegal about these "flashes" it does raise the issue about making the playing field level for everyone.

What so you think? We want to know!


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Trader disclosure: On July 28th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Seymour Owns (AAPL), (AA), (BAC), (FXI); Seygem Asset Management Is Short (VALE); Seygem Asset Management Is Short (PBR); Finerman's Firm Owns (MSFT), (PM), (SVU); Finerman's Firm And Finerman Own (BAC) Preferred Shares, Finerman Owns (BAC); Finerman's Firm Owns (WFMI) Puts; Finerman's Firm And Finerman Own (WFC) Preferred Shares, Finerman's Firm Is Short (WFC); Finerman's Firm Is Short (USO), (BWA), (IYR), (IJR), (MDY), (SPY), (IWM); Terranova Owns (MSFT), (MCD), (AMZN)

For Joe Terranova:
Terranova Works For (VRTS)
Terranova Is Chief Alternatives Strategist Of Virtus Investment Partners, Ltd.
Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO
Virtus Diversifier PHOLIO Owns (IGE),
Virtus Diversifier PHOLIO Owns (DBC)
Virtus Diversifier PHOLIO Owns (DBV)
Virtus Investment Partners Owns More Than 1% Of (ABD)
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Virtus Investment Partners Owns More Than 1% Of (CLB)
Virtus Investment Partners Owns More Than 1% Of (DLR)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (MEE)
Virtus Investment Partners Owns More Than 1% Of (DBC)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (DBA)
Virtus Investment Partners Owns More Than 1% Of St Mary Land & Exploration Co
Virtus Investment Partners Owns More Than 1% Of Seagate Tax Refund Rights
Virtus Investment Partners Owns More Than 1% Of (SKT)
Virtus Investment Partners Owns More Than 1% Of (TNB)
Virtus Investment Partners Owns More Than 1% Of (UA)
Virtus Investment Partners Owns More Than 1% Of (WBMD)

For Patricia Edwards
Edwards Owns (PM)
Storehouse Partners Owns (JNK) For Clients



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