Thursday's Dow Jones Industrial Average 1000-point drop triggered a roar of theories on the cause of the "flash crash." Was it a "fat finger" that entered an incorrect trade, leading automated trading systems to hit a high-frenzied sell mode? Did the initial sell-off fuel panic that escalated sales before manual corrections could be implemented?
As the New York Stock Exchange slowed trading, orders were routed to electronic exchanges that were not operating under the same safeguards and some companies' stocks were briefly valued at just pennies.
"I still haven't heard a satisfactory answer as to what happened and what could be done about it," Frank C. Boucher, the head of a Virginia-based financial planning firm, told Bloomberg on Monday – four days after the market's drop.
The Securities and Exchange Commission said yesterday (Tuesday) that it is still examining over 17 million trades to try and pinpoint the cause of the plunge. More energy has so far been put toward creating steps to prevent a future rapid sell-off than on trying to determine the events leading up to it.
The afternoon trading plummet prompted a meeting between the SEC, White House officials and the heads of eight exchanges on Monday to discuss how to prevent the incident from occurring again.
"We cannot allow a technological error to spook the markets and cause panic. This is unacceptable," said U.S. Representative Paul E. Kanjorski, D-PA, head of the U.S. House of Representatives capital markets subcommittee.
The exchanges have agreed to revise circuit breakers designed to stop trading during periods of extreme volatility, and to develop standards for handling erroneous trades. Almost all exchanges admitted that the markets' varying policies on halting trading contributed to the market roller coaster ride.
But now some investors who got caught on the downside will have to live with their losses – and decide if they can trust the system again.
"I suspect lawyers will circle around the situation, and the idea that trade cancellations cannot be appealed will get thoroughly tested in the courts," James Angel, a finance professor at Georgetown University, told Reuters. "You may have a negligence case against your broker for mishandling your order. But if you put in a market order and it happened to be filled at the wrong time, such as at a penny, you're stuck."
That brings us to next week's Money Morning Question of the Week: How has the market's "flash crash" affected your investment behavior? Do you like the steps taken so far to prevent this from happening again?
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News and Related Story Links:
- Business Week:
'Flash Crash' Poses Further Uncertainty for Stocks
Losers in stocks freefall may have little recourse
- Money Morning:
SEC, Major Exchanges, Working on New 'Circuit-Breaker' Rules to Avoid Another 1,000-Point Plunge in the Dow
- Money Morning:
The Real Story Behind Last Week's Stock-Market Panic
- Money Morning News Archive:
Question of the Week Feature