Today marks the three-year anniversary of the so-called ‘flash crash.’ That’s when one enormous futures trade triggered a sell-off, sending the Dow down by more than five percent in minutes.
While some blame automated trading systems for the ‘flash crash,’ technology is also behind the solution. If a company’s share price drops by 10 percent in a few minutes, trading in the stock is automatically limited.
“These mechanisms will either stop trading or make sure that trading doesn’t fall outside of a narrowly defined range so the market can always be at a rational place,” says Bill O’Brien is CEO of Direct Edge, the nation’s third largest stock exchange.
“That’s really one of the benefits of technology in the marketplace. You can make these corrections much more quickly had you had to enforce them manually,” says O’Brien.
Technology can’t be blamed for volatility, says Adam Sussman, a partner at the research firm, TABB Group.
“It hasn’t changed. It’s just that the time period over which those events occur have compressed from hours to minutes," Sussman says. He adds the market is safer now that orders are limited to a certain amount above or below the stock’s current price.
“The idea is that it’s a better protection against a fat-finger error, where someone is entering the wrong price. We’ve often seen that roil the markets,” he says.
But MIT finance professor Andrei Kirilenko doesn’t agree.
“I think the markets are no more safer now than they were then,” says Kirilenko. He says regulators need to catch up with the technology -- instead of regulating human traders, we should begin to regulate the software behind the automated trades.
Correction: An earlier version of this story misstated the anniversary of the flash crash. It is actually the third anniversary. The text has been corrected.
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