Flash crash

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A flash crash is a very rapid, deep, and volatile fall in security prices occurring within an extremely short time period. A flash crash frequently stems from trades executed by black-box trading, combined with high-frequency trading, whose speed and interconnectedness can result in the loss and recovery of billions of dollars in a matter of minutes and seconds.[1]

Notable

This type of event occurred on 6 May 2010 when a $4.1 billion trade on the NYSE resulted in a loss to the Dow Jones Industrial Average of over 1000 points and then a rise to approximately previous value, all over about fifteen minutes. The mechanism causing the event has been heavily researched and is in dispute.

Four notable flash crashes have occurred as of October 2016:

In October 2013 a flash crash occurred on the Singapore Exchange which wiped out $6.9 billion in capitalization and saw some stocks lose up to 87 percent of their value. The crash resulted in new regulations being announced in August 2014. Minimum trading prices of 0.20 cents per share would be introduced, short positions would be required to be reported, and a 5 percent collateral levy implemented. The exchange said the measures were to curb excessive speculation and potential share price manipulation.[2]

Two short-lived (less than a second) movements (more than 1%) in several (40 and 88) stock prices followed by recovery were reported for November 25, 2014.[3]

On 7 October 2016 there was a flash crash in the value of sterling, which dropped more than 6% in two minutes against the US Dollar. It was the pound's lowest level against the dollar since May 1985. The pound recovered much of its value in the next few minutes, but ended down on the day's trading, most likely due to market concerns about the impact of a "hard Brexit" - a more complete break with the European Union following Britain's 'Leave' referendum vote of 23 June 2016. It was initially speculated that the flash crash may have been due to a fat finger trader error, or an algorithm reacting to negative news articles about the British Government's European policy.[4]

References

  1. ↑ Bozdog, Dragos. "Rare Events Analysis of High-Frequency Equity Data". papers.ssrn.com. Wilmott Journal, pp. 74-81, 2011. Retrieved 20 November 2013.
  2. ↑ "Singapore Exchange regulators change rules following crash". Singapore News.Net. Retrieved 2 August 2014.
  3. ↑ "Two mini-flash crashes rock stock market Tuesday". MarketWatch. Retrieved 25 November 2014.
  4. ↑ "Pound struggles to recover after plunging 6% in 2 minutes". Financial Times. 7 October 2016.
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