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Is Another 'Flash Crash' in Our Future?

Monday, 6 May 2013 | 5:10 PM ET
Adam Jeffery | CNBC

Three years after the "flash crash" of 2010, DirectEdge CEO William O'Brien said he doubts it could happen again.

DirectEdge has the third-heaviest volume of any U.S. stock exchange, behind the Nasdaq and New York Stock Exchange. It has become a trading platform largely for high-frequency trading—ultrafast computer-based trading in which millions of shares can change hands in literally less than the blink of an eye.

"We are much better off now than we were three years ago," O'Brien said. "I don't think it can happen again. New circuit breakers have been installed, the markets are safer now than they were three years ago."

On May 6, 2010, the markets changed forever. Anxiety reached a new level as the Dow fell 1,000 points in a matter of minutes. Many traders, investors and market watchers at first blamed violence in Greece and worries that rioting there would spread to every European country contemplating austerity measures.

(Read More: Europe's Debt Crisis Won't End Until Greece Defaults)

There was fear that the stock market was coming apart at the seams. It quickly became clear, though, that there had been a system-wide trading problem that resulted in what we now know as a "flash crash."

Machine-based high-frequency trading became the main suspect. Algorithms designed to read factors affecting the markets began feeding on other algorithms, triggering a massive wave of furious selling that began with a large order to sell S&P futures contracts.

The Dow Jones Industrial Average recovered about 600 points late in the session. Since that day, the main indexes have jumped 50 percent from their lows.

But many still fear a second, massive flash crash could be in our future.

(Read More: 3 Years Later: Learning to Live With Flash Crashes)

Joe Saluzzi of Themis Trading is a vocal opponent of high-frequency trading. He says that it "has turned the global markets into a game" and that the next "flash crash" will be worse.

"We got lucky last time because the market had a chance to recover by day's end," he said. "What happens next time if it happens at the end of the day?"

But O'Brien at DirectEdge said technology isn't the problem but "the solution to making sure our markets work more safely as we go forward." Beyond having the potential to continue to make the markets safer, he said, technology has drastically lowered the cost of retail trading.

O'Brien agreed that more can be done to keep that system from spinning out of control but said he's confident another "flash crash" is not in the offing.

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