Special report: Globally, the flash crash is no flash in the pan
PARIS (Reuters) - The 20-minute "flash crash" will reverberate for quite some time to come.
For years, America's stock markets were the envy of the world, the model for modern trading -- fast, stable, efficient and for the most part transparent.
But after the Dow Jones industrial average .DJI plunged nearly 700 points on May 6 before sharply rebounding, that perception changed, possibly for good.
"On May 6, I recall this beautiful flash crash that was experienced by many of you," French Finance Minister Christine Lagarde sardonically told those gathered at a World Federation of Exchanges conference in Paris this week. "Well, we certainly don't want that to happen, and neither do we want somebody to press the wrong key and as a result encourage a nice algorithm to precipitate it."
The close examination of market structure in the wake of that stomach-churning freefall surprised even the most grizzled investors. They learned that a lone trader using computerized trading codes can submit tens of thousands of orders in a single second. As a result, many of the technological advances that are the hallmarks of modern stock markets are now viewed with at least a little suspicion.
"In the last 20 years came computers, electronic exchanges, dark pools, flash orders, multiple exchanges, alternative trading venues, sponsored access, OTC derivatives, high-frequency traders, MiFID in Europe, NMS in the U.S.," Thomas Peterffy, founder of Interactive Brokers Group (IBKR.O) and a revered trading industry veteran, told the conference.
"And what we've got today is a complete mess."
The flash crash has altered the heated debate over how to reconstruct the European Union's interconnected marketplace. And in Asia and Latin America, the aftermath is threatening to hamstring needed upgrades to trading systems, several industry executives and regulators told Reuters.
In a nutshell, the crash put the world's most sophisticated trading firms, hedge funds and brokers on the defensive, and it strengthened the hands of some traditional investors and even politicians who had agitated for better safeguards in the complicated marketplace.
The fallout has just begun.
Regulators, playing a bigger role, will at the very least shine a brighter spotlight on today's high-speed marketplace. At the most, they could try to put the brakes on trading advances that are now commonplace.
The Dow was down 1,000 points when it touched bottom on May 6. Based on the Wilshire 5000 total market index .W5000, the broadest measure of U.S. equities, that represented a brief paper loss of about $1 trillion from the day's open.
The incident muzzled exchange operators who previously rarely missed an opportunity to remind the world that public markets were relatively unscathed as the 2007-2009 financial crisis unfolded in private over-the-counter markets.
"I think we were sort of feeling very confident about that, and the flash crash has to some extent dented that confidence," Jane Diplock, executive committee chairman at the International Organization of Securities Commissions (IOSCO), said in an interview. "While the flash crash, fortunately, did not bring about systemic collapse, what it did was it showed us how important it is to understand what's happening in markets."