Flash Crash Part 2 Could Come at Any Time: Analyst

A former hedge fund analyst told U.S. senators on Thursday that another “Flash Crash” in financial markets could come at any time as a result of super high-speed computer trading.

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Photo: Oliver Quillia for CNBC.com
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The analyst was David Lauer, a high-frequency trading consultant to a Wall Street reform group called Better Markets, who testified before the Senate Banking committee, which is exploring whether or not legislation is needed to curb abusive activities on Wall Street.

“It is simply a matter of time before we have another catastrophe of the same magnitude or worse than the Flash Crash,” Lauer said in his prepared testimony.

“The next time it happens, we may not be so fortunate with regard to the timing — it was only luck that the Flash Crash didn’t start in the morning, inciting markets around the world to crash, or at 3:45 p.m. EST, with the market closing after the drop, but before it could recover. If this were to happen, there would be an overnight exodus from the market with disastrous consequences for the U.S. economy.”

Lauer said he personally experienced the panic of high speed market lurches as he sat on the global equity trading desk of a futures trading firm on May 6, 2010 — the day of the so-called Flash Crash, in which the market plunged, and then rebounded again sharply in a matter of minutes.

“As I watched the market crash, I witnessed something unthinkable: the market simply disappeared. For what felt like an eternity, but was more likely 30 seconds to a minute, there were no bids or offers displayed in the market for major stocks and ETFs such as SPY(the S&P 500 Index ETF ),” Lauer said. “None of us knew what to do or what would happen next.”

Lauer argued that all the volatility that has resulted from the Flash Crash and similar disasters in individual stocks and IPOs is causing retail investors to flee the market.

“The flight of the retail investor during a period of incredible stock market returns is a sure sign that this exodus is a result of mistrust rather than economic conditions,” he said in prepared testimony. “Since the Flash Crash in May 2010, over $283 billion has flown out of the U.S. Equity markets. Over that time period, the S&P 500 has risen by over 21 percent.”

The Senate also heard from supporters of high frequency trading, who argued that millisecond level transactions help markets find the correct prices for stocks and other equities quickly.

“Over the last four years, I have witnessed an unprecedented number of claims that our markets are horribly broken, unfair and dangerous,” said Chris Concannon, executive vice president of Virtu Financial. “These claims tend to be short on facts and evidence, but long on press coverage and book deals. Our market is not perfect. And it has recently experienced some dramatic mishaps. But, despite its flaws, it is a market that has withstood the most unprecedented volatility and repricing of equity values in our lifetime while maintaining the same levels of pricing efficiency.”

-By CNBC's Eamon Javers