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December 1, 2010

In a Flash

Flash Crash Dominates This Year's Top Stories

By Michael Scotti

The May 6 market correction of 2010, known as the "flash crash," was fitting for a year in which the speed of trading was the most hotly debated topic in equities. With executions in milliseconds and even microseconds, it was no surprise that a market could decline hundreds of points and rebound in minutes. Unlike declines of yesteryear, which might take days or longer, 2010's version was roughly a 20-minute round trip. A psychologist steeped in finance could safely call this a correction with attention deficit disorder.

The short-lived crash only ratcheted up the hubbub surrounding high-frequency traders. It also revived the issue of whether they have unfair advantages over other investors. That also raised the question of whether HFTs should have some of the same responsibilities as market makers, since they are the dominant liquidity suppliers. Critical voices took aim at HFT firms because they disappeared en masse from the market on May 6.

Washington was prominent again in 2010. Politicians got involved in everything-from HFT to market structure issues, going as far as questioning the validity of Reg NMS, which gave us today's marketplace. They turned up the heat on HFT to the point that these fast-trading firms began their own lobbying effort to counteract the negative press coverage and scathing commentaries from politicians and some practitioners. The Securities and Exchange Commission, meanwhile, had a full plate-from releasing its Concept Release in January to examining the flash crash. Where the Concept Release leads is anyone's guess.

But for traders, the top business story was the drying up of institutional flow in the last half of the year. Skittish investors and portfolio managers exited equities, which put pressure on brokerage firms to adjust to a low-volume, low-commission environment. Many wonder if some firms won't have to merge to keep the lights on. Amid this backdrop, Traders Magazine presents the top stories of the year.

 

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