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June 1, 2010

Flash Crash: A Day to Remember

By Barry Rehfeld

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  • Flash Crash: A Day to Remember

May 6 was a pretty good day to be trading stocks--even with a 12-minute market freefall that, at one point, cost investors $1 trillion. For starters, traders saw opportunities to make money under conditions that had been fairly rare of late. Volume soared to 19 billion shares, fattening commission revenues, and fundamentals-driven bargain hunters picked up quick gains. Even losers could be, if not winners, not losers, either, after many losses were reversed by the exchanges. 

Craig Rothfeld

Good news even appeared on the expense line of the day's income statement. Traders generally felt a surge in confidence seeing all their IT spending justified under extreme volatility without crashing.

That's not to say that it was easy keeping their hearts in their chests or that traders saw the drop coming any better than cartoon character Wile E. Coyote ever does. "I was shocked," said Bryan Lonsinger, head of equity positions trading at Janney Montgomery Scott. "I thought my Bloomberg went down. It had been incredibly calm. When I realized what was happening, I took a deep breath and went to work. It was very nerve-racking."

Nor do traders think that the fall and the Grand Canyon-wide bid-ask spreads that developed exemplify how the market should work. Indeed, the evolution of the market structure and current trading practices were thrown on the defensive.

Nasdaq criticized the NYSE for contributing to the collapse by slowing down the flow of orders. The other markets continued trading during the freefall.

Patrick Armstrong, co-president of the Alliance of Floor Brokers, said traders at the New York did what they are supposed to and the system worked. He noted that none of the trades on the NYSE needed to be reversed. He and Daniel Tandy, the other co-president, blamed regulation for the problem-notably Regulation NMS, which overhauled the U.S. equities markets.

Craig Rothfeld, executive director of WJB Capital Group, finds fault with dark pools and high-frequency trading. "There's no liquidity anymore," he said. "We're also kept in the dark on what's being traded. It's not a safe and secure market." Rothfeld is calling for more regulation of the pools and high-frequency trading. (Many suspect that the "flash crash" was accelerated by the dearth of bids, combined with the loss of high-frequency traders, many of whom shut down during the drop.)

Still, whatever threats traders may be operating under they got through May 6 without much, if any, damage. "It proved the performance of our trading platform," said Joe Sokolowski, managing director of U.S. principal program trading at Nomura Securities. "You don't like to see the price dislocations, but there were no disruptions."