Over-reliance on computers ‘caused Flash Crash’
A quarter of financial advisors think over-reliance on automated trading systems caused May’s freak stock market plunge
The Flash Crash of May 6 2010, in which stock markets lost and immediately recovered $1 trillion in value, was caused by an over-reliance on computer systems in financial trading, according to a quarter of financial advisors polled in a recent survey.
One in ten respondents believe the crash was caused by a technical glitch, while 19% said high frequency trading was a primary cause.
The majority of advisors polled said that the Securities and Exchange Commission’s plan to introduce a ‘single stock circuit breaker rule’, under which trading of any stock must pause if it gains or loses 10% of its value within five minutes, would help prevent a similar event in future.
However, they also said that such an event is ‘likely’ to occur again, whatever measures may be put in place.
Exactly what triggered the stock market crash is still unknown. Experts believe that the rapid steep decline across hundreds of stocks resulted from a chain reaction of stop-loss orders, whereby a stock is automatically sold if it falls below a certain price.
A US Congressional hearing into the cause and effects of the Flash Crash is currently underway. According to Futures Magazine, financial executives have told the hearing that many traders “are still too spooked to trade” three months after the event.