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May 7, 2014

Four-year Flash Crash anniversary haunts markets

“Even four years after the crash that wiped out $1 trillion in wealth in the blink of an eye, investors and academics still haven’t agreed on what caused one of the most vicious and inexplicable short circuiting of markets to occur.

“On that day, the Dow Jones industrial average plunged roughly 1,000 points only to recover in minutes. High-frequency computerized trading, believed to at least be part of the cause of the breakdown, is still a major force in the markets. There have been tweaks made to “circuit breakers,” or thresholds of volatility that cause trading individual stocks or the market to be halted. But these measures are widely viewed as putting Band-Aids on an open wound — it might offer some comfort, but does little to fix the underlying problem.

“’It can still happen now, and it does in certain (individual stocks),’ says Joe Saluzzi, trader at Themis Trading.

“Perhaps the reason why the problem isn’t being addressed is that we don’t really know — even four year later — what caused the 2010 Flash Crash. And as recently as 2013, there have been other widespread malfunctions in the market that remain largely mysteries. Regarding the Flash Crash of 2010, it took roughly five months before regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission released a report documenting the events that shook the markets. The report largely blames the ‘fragmented’ stock market where there are multiple marketplaces exchanging prices with each other.”

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Read full USA Today article here

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