GFS LinkedIn
GFS Facebook
GFS Twitter
GFS RSS feed

The flash crash

Thursday 10 June 2010 - by Luke Nelson

 On 6 May, the Dow Jones index had its biggest one-day drop in history. Luke Nelson takes a look at the causes and what is being done to prevent it from happening again

Very soon after the brief but dramatic series of events of 6 May took place in US markets, theories developed as to the causes of the “flash crash”.

So far, no one theory has gained universal consensus but there is more certainty around what happened.

At 2.23pm Nasdaq’s automated surveillance systems began issuing alerts in multiple securities exhibiting unusual price movements. From 2.39 to 2.47pm the Dow dropped 723 points to 9,869, its low for the day and down 995 points in total from the prior close.

From 2.47 to 2.56 pm the Dow recovered just as rapidly, rising 612 points from 9,862 to 9,974, down 387 points for the day. The remainder of the day saw the Dow rise another 45 points, ending the day down 342 points.

The first conclusion that some drew from the events was that the crash came about as a result of a ‘fat finger’ – trader-speak for a mistake. It has been suggested that an order of billions of shares was entered, rather than an intended order of millions. The US Securities and Exchange Commission chairman Mary Schapiro has downplayed this explanation of events.



She said: “There have been reports about a ‘fat finger’ error...while we cannot yet definitely rule that possibility out, neither our review nor reviews by the relevant exchanges and market participants have uncovered such an error.”
It seems more likely that the cause was an unfortunate series of events that came together to create the ‘perfect storm’.

Credit Suisse Advanced Execution Services managing director Dan Mathisson suggests that Greek riots created nervousness, volatility spikes casing quants to reduce their maximum position sizes, and then an initial selling wave from a large money manager hit the S&P futures knocking it to a discount.

He explains that as stocks followed futures down, the NYSE began to hit its Liquidity Replenishment Points, removing its bids from public quote.

An analyst at Barclays Capital points to a similar story, suggesting that there was already a lot of fundamental selling pressure in the market, and the rising risk aversion of investors did not need much of acceleration in the sell-off to run for the exits.


Article pages: |   1  |  2  |  3  |  4  |



WHAT DO YOU THINK?
 
Name:
   
Email:
   
Comment:
   
Post as Anonymous
  Display name
   
Please, enter security code
   
 

No comments yet.
INTERVIEWS & FEATURES
What corruption really costs
Heidi Lawson, partner at Chadbourne & Parke LLP, looks at the impact of compliance and corruption on a company's value.

STRAW POLL

Will markets in 2012 have a tougher time than 2011?

Yes

No

Don't know

View results

FIND A REGION world regions