Archive for October, 2010

Are You Ready For Another “Flash Crash?”

Friday, October 22nd, 2010

Investors have plenty of reasons to be skittish.

The “flash crash” in May demonstrated that the stock market doesn’t always behave the way it’s supposed to.  Human error, deliberate manipulation and technology can all be factors in preventing the market from being as efficient as it’s supposed to be.

The latest case of market mayhem resulted when a system upgrade at Arca, NYSE Euronext’s electronic stock market, triggered what appeared to be a 9.6% drop in the price of SPDRs, the popular exchange-traded fund that tracks the S&P 500 index.

The price dipped from $117.74 to $106.46, but was adjusted back to $118.54, up 0.7%.  In total, the pricing difference added up to $7.9 billion.

“The glitch in the fund with a market value of more than $80 billion comes as federal regulators are trying to prove U.S. exchanges still work after the May 6 crash that erased $862 billion of share value in 20 minutes,” according to Bloomberg.  “Data showing the decline appeared just as Apple Inc. and International Business Machines Corp. were releasing quarterly profit statements.”

Trading on the Chicago Mercantile Exchange in the E- Mini futures contract, another security linked to the S&P 500, played a major role in the May 6 “flash crash” that briefly sent the Dow Jones Industrial Average plummeting 998.5 points.

So it wasn’t quite Flash Crash II, but the software breakdown did seem like a warning that another flash crash may be in our future.