One Year After the "Flash Crash", Where Are We?

bigdog posted on 05/13/11 at 09:41 AM

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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Posted by bigdog on 05/13/11 at 09:41 AM


spshapiro posted May 13, 2011 (11:58AM)

In my wild and misspent youth I was given to a belief that there was a cabal of bad guys who coordinated their activities in order to ‘do’ us.  I am not going to argue that there are no bad guys, only that they are no more competent than the good guys to coordinate their activities. However you say that you had some trepidation at the advent and actuality of 5/6, there I think you were off base.  For if it was a group of HFT’s and not Bin Laden clones, they would have realized that activity on that date would be held to a higher scrutiny and if they were interested in carrying out further such activity in the future, the last thing they would desire is, more scrutiny.

As far as the "Limit up-Limit down" plan goes, I’m all in favor of anything that levels the playing field, but I fear that we are such a creative lot, that it is a matter of time before someone learns how to game this as well.  The only thing that stands the test of time is transparency, but then what’s the point of playing “War” when all the cards are face up? 

bigdog posted May 16, 2011 (10:00AM)

Good points as always, Shap. First, a clarification: my vague sense of foreboding about 5/6 was really that – vague. I didn’t necessarily expect the date to trigger any terrorist action or even inspire the trading-robots to go awry exactly one year on schedule. But I do recall clearly how, one year ago on May 6, the market’s downward slide took many of us by surprise and wasn’t fully explained for days. Unsettling to be sure, but hopefully resolved with some success.

I say “with some success” because I totally agree with your second point. These rule fixes are inherently temporary, until the players angle to change the rules of the game yet again. That’s true whether those players have good intentions or ill; market participants are simply always vying to get an edge. That’s why smart securities regulation can be a very useful protection for everyone.

Thanks for chiming in,

spshapiro posted May 16, 2011 (08:14PM)

I realize that superstition and other such activities may give some comfort in trying times, but I think that it is of little utility when tending to the market.  I do think that when we can find a pattern and a purported reason for it, it could prove to be useful in our trading.  But I’m looking for Reasons, not just constant conjunction; otherwise, it might truly be worthwhile to let a monkey throw darts at the stock page.

Now to the second, and more important point;-  The market is a dynamic enterprise, and because of that fact will NEVER admit to final rules.  There are some clowns in congress who feel that somehow, original intent means that we can’t adapt.  Regardless to the contemporary educational views of Texas, the issue of evolution is settled science.  The market is one of the expressions of the activity of one of the more evolved organisms in this cosmos, and as such an activity, it will by nature never admit to one final set of rules. 

bigdog posted May 17, 2011 (09:03PM)

Amen to all that, Shap! You’re absolutely right to poke holes in any market superstition - I will stop indulging my overexcitable imagination about May 6 right now. ;-)
And I like your comparison of the marketplace to an evolving organism, or ecosystem. It’s very apt: it’s always changing and adapting to altered conditions around it; government regulation is one limiting condition among many. I had a history teacher in high school, Emil Elges, who used to say that any large group made up of people will as a unit or entity sometimes take on a “personality” as if it was a person itself. He used to talk about nations going through “adolescent” behavioral periods, etc. I think you’d agree it’s the market’s dynamic nature, its combination of quantifiable and more subjective views and pressures, that makes investing in it so absorbing.

spshapiro posted May 29, 2011 (10:57AM)

Have you ever considered that this is really only an extension of the 'Gaia' thesis, i.e., the earth in itself can be considered as an organism.

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