Tuesday, May 7, 2013

Flash Crash Anniversary: Three Years

Three years ago today, a stomach-churning stock-market plunge rattled Wall Street. Fears of a repeat occurrence remain omnipresent.
In what quickly became known as the “flash crash,” the Dow Jones Industrial Average plunged nearly 1000 points in the matter of minutes before rebounding quickly. It was one of those eye-opening events that exposed many flaws in the structure of the market, many of which market observers say have yet to be addressed today.
While the markets largely have avoided such a catastrophic event, there have been several instances recently that have stoked fears of another haywire event. Just last month, a Twitter hoax sent the Dow tumbling 145 points in seconds, briefly erasing $200 billion of value from U.S. stock markets. And individual stocks regularly are hit by trading issues Google Inc. GOOG +1.87%, for instance, briefly suffered a mini-flash crash last month.
Themis Trading, a New Jersey brokerage and one of the most outspoken critics of high-frequency trading, offered its state of the market three years after the flash crash. Unfortunately, it’s not a pretty sight.
“What appears to be a well-functioning market structure in a diminished volume, low volatility, and complacent environment has the potential – in fact the likelihood – to self-destruct in times of stress,” Themis says in a blog post.
A trip down memory lane shows exactly what happened three years ago today, what went wrong and how several large-cap stocks — including Apple Inc. AAPL +2.38% Procter & Gamble PG -0.56% and Accenture ACN -0.86% — briefly collapsed.
The flash crash has often been cited as one of the main reasons investors remain reluctant to get excited about stocks, even with the market at record highs. Trading volumes remain low, investors are only starting to dip their toes back into the market and a general distrust around high-speed trading and other aspects of the market hasn’t waned.
“It is increasingly obvious to any market observer that our industry and our regulators will continue to stall and ignore the cores issues and problems until we have another substantially damaging market event,” Themis says. “Make no mistake; we are all thrilled that the market has made new highs, fueled by QE and improving economic conditions.
“However it is precisely now that we should be fixing the plumbing and conflicts underneath the thin crust of liquidity, so that when inevitably stress does return we are tooled to deal with it from a market structure perspective.”
Related: Paul Vigna and Steven Russolillo discuss the three-year anniversary of the Flash Crash on WSJ’s MoneyBeat show: