Flash Crash Aftermath

It’s been months since the flash crash that caused several major stocks to trade at values close to zero for a few minutes before returning to a more reasonable level. Since that time several mini flashes have occurred. And yet, no irrefutable proof exists to blame any one type of trader. Most importantly virtually no policy changes been enacted to prevent a repeat occurrence.

I contend no one type of trader is to blame, but rather all traders are to blame. When a $40+ stock is suddenly trading for less than a dollar, how does no one step up and offer 35? It’s equivalent to a company that sells 1 IPOD online every min to the highest bidder. If suddenly they started selling for $1, someone would step in and offer a “reasonable” price.

So the question is; why doesn’t this happen.

1) Black box trading programs which typically help make the market are deigned to shut down when massive swings occur to give a human the chance to override the program. Trading itself shuts down when this takes place, except that there are now secondary markets that don’t abide by these same rules.

2) Typical investors have stop losses in place. If they stock drops below a certain level they give the order to sell at any price. Usually this is the price they set but if there are no buyers in the market then they could sell for far less than intended.

3) The traditional market makers have vacated their usual roles. Black box programs have replaced them and reduced the overall cost of trading. The bid/ask spread is far smaller today than it was 10 years ago. They’ve left because they can’t make money.

Stopping these crashes from taking place doesn’t require placing blame on one of the 3 groups above. They are all to blame but each is doing what make rationale sense to them. What needs to take place is that when a listing exchange flips the breakers and halts trading all the secondary exchanges need to halt trading for at least the same amount of time, if not longer. What is needed is a chance for cooler, more logical heads to prevail.