Cause of Flash Crash Still Unknown

Will It Be Ever Found?

1 min read
Cause of Flash Crash Still Unknown

There was a story in the New York Times last week that reported Mary Shapiro, chairwoman of the Securities and Exchange Commission (SEC), as saying that the cause of the “flash crash” of the New York Stock Exchange in May has still not been determined.

According to the Times, the SEC is” exploring several theories,” which I interpret as meaning that they still don’t have a clue.

This is not surprising, if you read another story that appeared in USAToday about the rise of automatic trading in stock markets, where millions of trades occur in a matter of seconds.

The USAToday story, which is worth a read, describes the different ways electronic trading can be used to manipulate the market, and how regulators really don’t have the tools to stop it. Even the addition of so-called “circuit breakers” by exchange regulators to keep flash crashes from spinning out of control may instead have other negative consequences, according to this Forbes magazine blog post.

The story also talks about the benefits of electronic trading, especially allowing non-professional traders to gain low-cost access to the market, but also how traders – professional and casual alike – need to adjust their trading behaviors to electronic trading algorithms vice the other way around.

Noting an observation from Eric Hunsader, founder of market data feed provider Nanex, the USAToday story says:

Technology was supposed to even the field between professional traders and individuals. In reality, though, the rise of the machine on Wall Street shows individual investors are even more outgunned than before due to factors many will never see or perhaps understand.”

That apparently goes for the SEC and other market regulators as well.

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