One Year After the "Flash Crash", Where Are We?
I don't know about you folks, but I found myself (somewhat superstitiously) holding my breath all day on May 6, the one-year anniversary of the so-called "flash crash". As many of you recall, on that day the markets tanked unexpectedly, then staged a sudden surge in the opposite direction. The move was big enough to look like a major market correction, but turned out to be mostly a computer glitch. Fingers all along Wall Street pointed at "high frequency traders", HFT for short, and the super-juiced computers they use to manipulate markets, sometimes to deleterious effect.
Well, we made it through the anniversary without incident. There's plenty of debate about whether the steps taken thus far by regulators go far enough to protect against a recurrence or similar event. This article from an industry newsletter, Securities Technology Monitor, reports that one measure put in place seems to be working well so far - 100 stocks trip the SEC's circuit-breakers every day. If that sounds like an alarmingly high number to you, the article goes on to report that 2.25% of stocks on any given day trip the circuit-breakers, which is actually lower than the 4% the SEC originally planned for when instituting these single stock circuit-breakers. The original rule, established one month after the 2010 flash crash, required the exchanges to pause trading in certain stocks when the price moves 10% or more in a 5-minute period.
Securities-industry nerds like me will find the SEC's idea to replace this rule with a "collar" strategy interesting, too. As the article puts it, "The proposed “Limit Up-Limit Down” mechanism would prevent trades in listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period." As a colleague remarked to me recently about this "Limit up-Limit down" plan, "Why didin't we think of this long ago?"
Bottom line, we made it through what felt to me like a potentially unlucky market day...knock on wood. Here's to the successful implemetation of "Limit up-Limit down" and anything else that can reasonably, transparently and effectively protect from similar events going forward. We will all benefit from smooth market functioning all through the summer and beyond!
[image: 1909 Victor Flash Lamp by Couch Commando on Flickr]
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