On the one-year anniversary of the infamous ‘flash crash’ that sent the Dow industrials plunging nearly 1,000 points in less than 20 minutes, questions remain about how prepared markets around the world are to stop a similar event.
“The SEC has done a good job to create an infrastructure, but in other markets creating this type of infrastructure is not as easy,” said Larry Tabb, CEO of the Tabb Group, which tracks the exchange industry.
In the aftermath of the May 6 flash crash, the Securities and Exchange Commission established new rules — including expanding the use of “circuit breakers” to include exchange traded funds and stocks. Circuit breakers halt trading when a stock or an index falls by a certain percentage in a short period of time.
As U.S. regulations were being shored up, volatility and volume on U.S. exchanges was drying up. And that was forcing high frequency traders to seek out other markets, largely in emerging economies. But that shift could be leaving those exchanges vulnerable to a ‘flash crash’ scenario.
In the May 6 flash crash, all it took was one trader who accidentally tried to sell a massive amount of a security tied to the S&P 500 index. That led to a cascading amount of sell orders throughout the market.