A Fat-Finger Anniversary: Was the Flash Crash just a Flash?

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Where were you the day the market dropped nearly 700 points in 20 minutes? Don’t remember. You’re not alone.

May 6th was the one-year anniversary of the so-called Flash Crash. It came and went without much fanfare. But on the day of the event a year ago and for a few months after, it seemed like a really big deal – clear sign the US stock market was broken. Senator Charles Schumer wrote the Securities and Exchange Commission looking for changes. The Wall Street Journal wrote articles on how the flash crash had created an enduring legacy. I reported on the likely changes that would be made to the market. Jon Stewart, even got into the action, questioning why the perfect storm on Wall Street seems to come every week or so. Is that the sign of a problem?

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So what did we end up doing to repair our sh**ty boat (you have to watch the Stewart video to the end). Not a heck of a lot. Why? First of all, the market recovered all of its Flash Crash losses within days. More importantly, at least so far, the Flash Crash has been a one-off. There have been similar big swings in individual stocks but nothing like the market-wide dive that happened last May. What’s more, there are signs that a repeat of the year-ago event is becoming less likely.

One of the reasons the Flash Crash was such big news was because even before it happened there was a growing amount of uneasiness about high-frequency trading. Computers it was assumed were going to take over trading, and that was going to lead to more swings in the stock market. But, again, that hasn’t happened. In fact, volatility has been falling. And it appears a year after the flash crash there are fewer high-frequency traders, not more.

So does something still need to be done to curtail the possibility that a flash crash-like event would happen again? Perhaps, but not really because it would happen again, or at least not all that regularly. The real reason something should be done is that there is a sense that there is something wrong with the public markets. And that is in part what is fueling the growth in the private markets for shares of such companies as Facebook and Twitter. A strong regulatory move on high-frequency trading would be a good signal to the average investor that the SEC is still on the beat making sure the market is fair for all. Schumer is now proposing a tax on high-speed traders that would make it more expensive for them to put out phony orders they don’t actually complete. That might drive some high-frequency traders away from the market, but it appears they are leaving anyway.