The threat of another flash crash caused by high-frequency trading is as great as ever.
And the next flash crash could be much worse than the one that shocked investors in May 2010.
Although the Securities and Exchange Commission (SEC) has taken some steps to prevent another flash crash caused by high-frequency trading (HFT), some experts question whether the additional disclosure and "circuit-breakers" designed to prevent big, sudden price moves will make a difference.
"Those things won't prevent another flash crash – they can't," said Money Morning Capital Waves Strategist Shah Gilani. "All they will do is soften the move."
The real issue, Gilani said, lies with the computers that execute the trades – thousands of them in milliseconds.
HFT has changed the nature of the stock market since these trades now account for between 60% and 70% of the transactions on the U.S. stock exchanges.
"You can't stop a flash crash unless you stop the computers from doing what they're programmed to do. And that's not being addressed," Gilani said. "The SEC is looking at keeping the ship from sinking, not stopping it from hitting icebergs."
HFT's heavy volume and high speed made it the prime suspect in the flash crash of 2010, when the Dow Jones Industrial Average plunged more than 600 points in five minutes, before recovering almost as quickly.
Mini Flash Crashes
Since then, the frequent occurrence of mini flash crashes – when a single stock or exchange-traded fund experiences a steep and rapid drop in price that quickly reverses – have served as nagging reminders of the vulnerability of the system to such events.
"It's like seeing cracks in a dam," James J. Angel, professor at the McDonough School of Business atGeorgetown University told The New York Times. "One day, I don't know when, there will be another earthquake."