A year and half after the May 6, 2010 flash crash, which resulted in impossibly rapid price gyrations and scared the daylights out of investors, no one has fully explained what happened. Therefore, it could happen again at any time. “Flash Crash Threatens to Return With A Vengeance,” CNBC.com.
In general, complex technological systems have proliferated (not just in financial markets but everywhere) creating systems of systems that no one fully understands, according to the article, citing the head of the UK’s Large-Scale Complex Information Technology Systems project and the head of a similar project run by Carnegie Mellon University.
These researchers believe that the flash crash was not an anomaly but rather was an entirely predictable event that could have been dramatically worse than it was. If the flash crash had occurred later that day, prices would not have had time to recover before the close of US markets. This would have wreaked havoc when Asian and European markets opened.
“The true nightmare scenario would have been if the crash’s 600-point down-spike, the trillion-dollar write-off, had occurred immediately before [US] market close,” the researchers were quoted as saying, adding: “The only reason that this sequence of events was not triggered was down to mere lucky timing.?.?. the world’s financial system dodged a bullet.”
There is no reason to believe such lucky timing would reoccur. And, since May 6, 2010, several mini flash crashes have occurred in commodities markets.
With today’s extreme volatility, the last thing investors need is the threat of another more damaging flash crash hanging over their heads.
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.