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Business Title: Another 'Flash Crash' Coming? Some Market Pros Think So Another 'Flash Crash' Coming? Some Market Pros Think So Published: Monday, 21 Jun 2010 | 2:09 PM ET Text Size By: Jeff Cox CNBC.com Staff Writer The May 6 "flash crash" may be history, but its after-effects—and threat to the stock market—continue to loom large after two recent mini-crashes in individual stocks. Regulators have characterized the initial flash crash, which saw the Dow lose nearly 1,000 points in a matter of minutes, as a one-off occurrence possibly attributable to a "fat finger" trade or some other market anomaly. But a growing chorus of traders and legislators believe the flash crash is symptomatic of a larger problem with high-frequency trading and a market that lacks visibility and is susceptible to similar events in the future. "We have a global economy and a global trading system, but we don't have a global framework to deal with it yet," says Doug Roberts, chief investment strategist at Channel Capital Research. "Until you do, you're going to be prone to this. With the average investor, they're going to want to be a little bit more conservative." Jeff Cox Staff Writer CNBC.com The problem could be even more serious when it comes to investor confidence. While market volume always thins out in the summer, some think the flash-crash also is playing a role and could be a long-term deterrent to participation if regulators don't come up with preventive measures soon. "People are voting with their feet," says Sen. Ted Kaufman (D-Del.), who has been pressing the Securities and Exchange Commission and Congress to address the underlying causes that led to the flash crash. "Why would they not be concerned? We are playing with dynamite here." Thus far, the main reaction has been the implementation of circuit breakers that stop trading on individual stocks should they rise or fall more than 10 percent in a five-minute span. The rule, implemented for a six-month test period, got its first workout last week when Washington Post [WPO 456.05 -0.04 (-0.01%) ] shares doubled inside of a second Wednesday, from nearly $460 to $929.18. The circuit breakers essentially did their job, halting trading in the company after the surge. But the mystery remains over why such events happen in the first place. The WaPo jump was the second flash-crash since the initial event. Tech services company Diebold [DBD 29.74 0.43 (+1.47%) ] saw its shares plunge 35 percent then recover in a period of a few minutes on June 2, before the circuit-breakers kicked in. The non-transparency that stems from high-frequency trades, which can happen in milliseconds, makes tracking the trades virtually impossible. Some estimates have high-frequency trading accounting for about 70 percent of all market activity. A congressional panel looking into the issue has made little headway. "Before you can actually get involved with the market structure, you have to have some idea of what is happening inside the black box. A bunch of people sitting in a room starting at the black box and saying, 'What are we going to do about it?' doesn't help," Kaufman says. "The high-frequency trading industry has been very successful in slowing down any real investigation into what's happening." Defenders of high-frequency trading say it pumps liquidity into the markets and makes fair trading possible. But perhaps the most stunning characteristic of the flash crash was that liquidity actually evaporated from the market, sending shares of some big-name companies momentarily to a penny when they couldn't find a bid. Exchange-traded funds, many of which pop onto the market with little notice and trade at anemic volume levels, were particularly susceptible to the flash crash, accounting for about 70 percent of the cancelled trades in the aftermath. "Exchange traded funds as a class were more affected by the flash crash of May 6 than any other category of securities," the Investment Technology Group said in an analysis. "[P]rice discovery failed dramatically for this class of securities during the crash, and ... the proximate cause was an extreme deterioration in liquidity, both in absolute terms and relative to individual securities in the baskets tracked by the funds." Still, some traders believe the integrity of the market is intact and investors have little to fear, even though there's little reason to believe future flash crashes won't happen. "When you have computers in the marketplace there can be malfunctions or blips. It happens all the time," says Todd Horwitz, chief strategist at the Adam Mesh Trading Group in New York. "They're working at this slowly and moving in to protect the investor...I don't think the average investor should be overly concerned." Roberts thinks establishing a centralized exchange for derivatives, which now trade over the counter and are far less visible than typical stock trades, would help. He also favors reinstating the uptick rule, which mandates short sales only after a move up. "Until you get these things in a centralized exchange or until they're under centralized regulatory control, you're dealing with part of the problem but it finds somewhere else to go," he says. "It's like a cancer in the body. The real concern with cancer is it spreads somewhere else—it's systemic as opposed to localized." From a legislative standpoint, Kaufman, a trader himself who took over a Delaware Senate seat after Joe Biden ascended to vice president, says the first stage in the process is finding out what specifically caused the flash crash and getting transparency into the markets. Yet he remains frustrated that Congress is moving so slowly to address the issue. "There's no real sense of urgency. Our market is in trouble," Kaufman says. "This is not a trivial problem."
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#1. To: Badeye (#0)
Given most "program" trades take on a position for a a minute maximum [some are as short as 10-15 seconds] there is 0 that the "global market" can do because of the inherent slowness of humans versus computers.
#67. To: war (#48) Keep hiding behind the bozo, bozo. (laughing) You've always been a world class pussy. Badeye posted on 2010-01-14 16:12:48 ET Reply Trace I'm biased, obviously, given the shit I'm subjected to daily here from the anti groupie. Badeye posted on 2010-06-10 11:34:31 ET Reply Trace Private Reply
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