“Flash Crash” – Why is This So Hard to Understand?

“On May 6, 1010, the New York Stock Exchange was intentionally shut down for 90 seconds by those in charge,” recounts Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “When this happened there was no market (bid and ask quotes) for many large cap stocks, except on small exchanges and the ‘third market.’ Meanwhile trading programs continued to submit market orders.” Shepherd continued, “Market orders in a ‘thin’ market are always a recipe for disaster. The question people should be asking is: Who decided to stop trading on the NYSE without warning and why? Imagine how much money could have been made by anyone who knew of this shutdown in advance!”

Shepherd’s observations come in the wake of NYSE Euronext chief executive officer Duncan Niederauer’s address to attendees at a recent National Association of Corporate Directors conference. Niederauer acknowledged that there is more that needs to be done to understand the events leading up to the flash crash. He said that while the Commodity Futures Trading Commission and the Securities and Exchange Commission had put out a “very well done” report that explained why markets dropped 4 or 5% that day, the reason why prices for some individual stocks plummeted by almost 100% remain unclear.

The Dow Jones Industrial Average dropped by over 573 points during five minutes of trading that day before taking 90 seconds to reverse and regain 543 points. Although the CFTC and the SEC have determined that the flash crash was started by a mutual fund complex that used computer algorithms to quickly sell $4 billion in futures contracts, Niederauer has said that there is still both information and misinformation. He contends that to bar high-speed electronic trading is impractical despite the fact that the US market structure is “more vulnerable than we thought.” He said the NYSE stands behind a model that comes with market maker obligations that are clearly outlined and that this can be used to determine whether the market maker is “doing a good job.” More market structure rules are expected in January.

Related Web Resources:
Flash crash’ shows need for price discovery and safeguards, NYSE
CFTC And SEC Release “Flash Crash” Report, FuturesMag.com
Read the SEC and CFTC Report (PDF)

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