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A year on the U.S. market's flash crash didn't prove transformative

posted 5 May 2011, 14:28 by Mpelembe   [ updated 5 May 2011, 14:31 ]

One year after the infamous Wall Street "flash crash" experts take a look at what has changed and what still needs to be done to prevent a repeat of that historic day when the Dow plunged almost 700 points in a matter of minutes.

NEW YORK CITY, NEW YORK, UNITED STATES. NYSE - In the hours and days after last year's "flash crash," it seemed like Wall Street's high-tech marketplace was in for big changes.

The May 6, 2010 market plunge confused and panicked investors as they watched the Dow plummet almost

700 points in a matter of minutes, briefly wiping an estimated $1 trillion (USD) in market value right of the table.

Shamed regulators and exchanges had no answers. The next day, President Barack Obama promised that U.S. authorities would do what was needed to prevent it from happening again.

Yet a year later, little has changed -- suggesting that while the flash crash was historic, it was not transformative.

Harvey Pitt, former head of the Securities and Exchange Commission from 2001 to 2003, said the response so far is a partial one.

"I'm satisfied with the efforts regulators are making. I'm disappointed in the fact that we don't have in place all of the pieces we need to ensure the trading public that events that occurred a year ago are not likely to be repeated and that's a serious concern in my view."

The rise of electronic trading driven by mathematical equations, called algorithms, has been one factor blamed for creating a big imbalance that day.

New York University professor Robert Engle is on a special committee that investigated the crash and pitched some radical fixes to regulators. He said the crash exposed new risks in a changing marketplace.

"Our cost of trading have dropped dramatically, partly through computers, just as the trading volume has increased dramatically and in some ways our market have performed better than they ever have in the best, but there is this concern that there is instability there and that's the reason the flash crash was such an important event."

While the Securities and Exchange Commission has not figured out exactly what happened - it has been busy examining the past, trying to prevent a repeat in the future.

Michael Shaoul, chairman of Marketfield Asset Management, explained that not much can be done to reassure skeptical investors.

"Unfortunately, I don't think you can guarantee that it won't happen again. I think maybe a better way to address it is to educate the consumer and explain that even if it happened again it would come and go. They have put trading halts in place. You wouldn't actually get the flash crash occur again simply because some of the regulatory changes they've made there would be a halt in trading, which may be even more unnerving," Shaoul said.

Besides the trading halt, few major changes have been made to keep a sell-off orderly in the rapidly changing world of computerized trading - something many investors seem to be looking past as the market sits near multi year highs.