Four-year Flash Crash anniversary haunts markets

A trader on the floor of the New York Stock Exchange looks at stocks during the final minutes of trading May 6, 2010 as the Dow lost almost 1,000 points before recovering to a loss of 505.
Timothey A Clary | AFP | Getty Images
A trader on the floor of the New York Stock Exchange looks at stocks during the final minutes of trading May 6, 2010 as the Dow lost almost 1,000 points before recovering to a loss of 505.

Even four years after the crash that wiped out $1 trillion in wealth in the blink of an eye, investors and academics still haven't agreed on what caused one of the most vicious and inexplicable short circuiting of markets to occur.

On that day, the Dow Jones industrial average plunged roughly 1,000 points only to recover in minutes. High-frequency computerized trading, believed to at least be part of the cause of the breakdown, is still a major force in the markets. There have been tweaks made to "circuit breakers," or thresholds of volatility that cause trading individual stocks or the market to be halted. But these measures are widely viewed as putting Band-Aids on an open wound — it might offer some comfort, but does little to fix the underlying problem.

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Perhaps the reason why the problem isn't being addressed is that we don't really know — even four year later — what caused the Flash Crash. And as recently as 2013, there have been other widespread malfunctions in the market that remain largely mysteries. Regarding the Flash Crash of 2010, it took roughly five months before regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission released a report documenting the events that shook the markets. The report largely blames the "fragmented" stock market where there are multiple marketplaces exchanging prices with each other.

Breaking HFT's 'cone of silence'
Breaking HFT's 'cone of silence'   

If any part of the networks connecting traders broke down, just a single trade could cause problems, the regulators found. The SEC and CFTC focused in on trading in so-called E-Mini S&P 500 contracts, which are complex financial instruments used to bet on the future direction of markets. Academics and other market observers have taken issue with parts of the regulators' studies, meaning that even today, the cause of the event is in dispute.

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And while there hasn't been a major broad Flash Crash repeat to the magnitude of the one in 2010, that's not likely due to any changes in the markets. Just last week, the NYSE was fined for not following rules with trading, or not even having rules in past. This is one time where traders hope history doesn't repeat itself.

"Thankfully we've not seeing the 'big one,' but it could happen again," Saluzzi says.

—By Matt Krantz, USA Today