What caused the flash crash?

Dow Jones loses al­most 1 000 points – and re­cov­ers in­stantly. How?

Finweek English Edition - - Techtrends - SIMON DINGLE

YOU CAN’T BLAME the con­spir­acy the­o­rists for their out­ra­geous ideas as to how mar­kets in the United States man­aged to shed al­most 1 000 points on 6 May. It was weird. Al­most a tril­lion dol­lars worth of eq­uity were wiped out in a flash – and then re­cov­ered al­most as quickly.

The strangest the­ory as to how that hap­pened I’ve heard so far in­volves the test­ing of a flash-trad­ing com­puter sys­tem by Gold­man Sachs de­signed to make ex­tremely short-term trades. Ac­cord­ing to the story, the sys­tem was turned on and sub­se­quently caused the trou­ble be­fore be­ing shut down. Yeah, right. An­other the­ory pos­tu­lates a typo caused the crash, with a trader spec­i­fy­ing bil­lions in­stead of mil­lions. Not likely.

The more sane the­o­rists seem to think it was sim­ply the re­ac­tion of a skit­tish trad­ing com­mu­nity shaken by the dras­tic down­turns of 2008 and com­mit­ted to sell­ing fast when things looked like re­turn­ing to that sit­u­a­tion. That seems more plau­si­ble – ex­cept that flash trad­ing is sup­posed to be limited by sys­tems in­stalled in the Eight­ies. The New York Stock Ex­change in­stalled cir­cuit break­ers af­ter the 1987 crash de­signed to pre­vent that sort of thing.

The ques­tion now fore­most in in­ves­ti­ga­tors’ minds ap­par­ently con­cerns mar­ket ac­cess, since loop­holes in the trad­ing ingress are thought to be a con­trib­u­tor. The US Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) has started its in­ves­ti­ga­tion un­der the guid­ance of its chair, Mary Schapiro. Flies on the wall re­port no con­clu­sions have been made yet and that the in­ves­ti­ga­tion will take time.

That’s of­ten re­ferred to as “naked” ac­cess and al­lows reg­u­lated bro­ker/deal­ers to lease out their ac­cess to the ex­changes to un­reg­u­lated clients.

Last Mon­day posted a re­port on its web­site say­ing it had traced a “Black Swan” hedge fund trade by Uni­versa In­vest­ments that ap­peared to have sparked the flash trad­ing. “On any other day, this $7,5m trade for 50 000 op­tion con­tracts might have briefly hurt stock prices, though not caused much of a rip­ple. But com­ing on a day when all va­ri­eties of fi­nan­cial mar­kets were deeply un­set­tled, the trade may have played a key role in the stock-mar­ket col­lapse just 20 min­utes later.

“The trade by Uni­versa – a hedge fund ad­vised by Nas­sim Taleb, author of – led traders on the other side of the trans­ac­tion, in­clud­ing Bar­clays Cap­i­tal, the bro­ker­age arm of Bri­tish bank Bar­clays plc – to do its own sell­ing to off­set some of the risk, ac­cord­ing to traders in Chicago.”

With SEC in­ves­ti­ga­tions un­der way, the truth be­hind the brief crash should emerge over time.

It will even let you share your files over the In­ter­net, so you can ac­cess your hard drives from any­where. How­ever, that can be tricky to get work­ing, es­pe­cially in South Africa, for tech­ni­cal rea­sons re­lat­ing to In­ter­net ad­dresses – but I’ll spare you the de­tails.

At around R700, the iCon­nect is a de­cent home net­work so­lu­tion and could even be use­ful for small busi­nesses that need an easy way to share hard drives for back­ups and file-shar­ing, or prin­ters.

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