From reading the SEC and CFTC’s 79-page report on the flash crash of May 6, when the Dow Jones dropped almost 1,000 points in 15 minutes, it becomes clear that neither of the regulators has an explanation. One thing is for sure though, says Joe Saluzzi, co-head of US equity trading firm Themis Trading: "It will happen again." He’s not alone in his opinion.
The possibility that it was the error of a fat-fingered trader, or an erroneous algorithm, now seems to have been ruled out, which leads to the conclusion that the structure of the market is broken, says Saluzzi. "There was nothing particular about that day. It is simply how the market is now. There are major structural issues and the foundation isn’t solid."
What Saluzzi is implying is what many are now asking, the SEC included – are there simply too many high-frequency traders dominating the market? High-frequency trading accounts for around 70% of the daily volumes traded in the US, according to research firm Aite. "What happens if the high-frequency traders stop trading a certain day? There is a major imbalance in the system," says Saluzzi.
Hedging halted
The flash crash was aggravated by the inability of the electronic pricing technology to update market prices as volumes increased.
