Rambus: A Flash Crash in Action

It's been a year since the flash crash that tested the faith of investors . Many wondered whether stock exchanges have any power at all to prevent small market panics from turning into bloody stock massacres. Some Wall Street veterans are still having traumatic flashbacks and visiting psychotherapists about that day.

Last week, SEC chair Mary Schapiro told Marketplace that the markets are in much better shape now if we face another flash crash.

Today, that theory is being tested - and frequently - by not one, but six trading halts in a single stock: Rambus Inc. Nasdaq's circuitbreakers appear to be working to keep the shares of Rambus Inc. from falling in a panic. It seems to be working.

You may never have heard of Rambus unless you're a die-hard techie. Rambus is a small semiconductor company that sells its technology to brand names. It competes with companies like Samsung, Micron and Hynix.

Today its stock has been behaving oddly. After closing yesterday at $19.27, it spiked up to $21.68 at 11:44 am. Then it tanked almost 35% $14.18 just 30 minutes later. Check out the stock chart at Google Finance. Over the past year, Rambus' stock has never fallen below around $16.

In addition, traders are throwing around nearly 10 times as many shares of Rambus as they usually trade. Consider that over 7 million Rambus shares have traded hands today - compared to its average of 778,674 shares each day.

The result of all this? Nasdaq used circuitbreakers to halt all trading in Rambus's stock today - not once, twice, but six times.

Easy Street talked with Sal Arnuk of Themis Trading today; he was one of the first people we knew to notice the unusual activity.

He noted that tripping a circuitbreaker is pretty hard to do. Here's what it takes: A stock moves10% in just five minutes. If that happens, the exchange halts trading of that stock for five minutes. Then the exchange releases the stock.

And if the cycle starts again, trading is halted again. Rambus appeared to have been caught in this vicious cycle.

That's not the only levee that Nasdaq has in place to prevent these flash-crashes.Rambus is also tripping a second layer of protection to prevent vultures - or panickers - from destroying a stock completely.

It's a short-sale circuitbreaker. Short-sellers are traders who make bets that a stock will fall. They're not allowed to do that if the stock is down 10% from the previous night's close. The basic purpose is that it keeps traders from selling, selling, selling in a panic until a stock goes to zero. They have to wait until the stock goes up - which Rambus did.

There's a lot of news from Rambus today, and it's bad enough to move the stock. For instance, a court ruled that Rambus inappropriately destroyed documents related to a patent case. In addition, Rambus announced an acquisition.

Still, no matter how bad the news is, Nasdaq and other exchanges take the stance that it shouldn't cause a panic or a flash crash. The Rambus case shows that the exchanges have done something right, at least in this case: a stock may suffer without infecting the whole market.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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