Experts: Canceling 'Flash Crash' Trades Hurt Investor Confidence

Friday, 25 Jun 2010 12:30 PM

 

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The "flash crash" caused a greater loss than the $1 trillion in market value that was briefly wiped out last month: It put a huge dent in investor confidence.

While the exact cause of the tumultuous market disruption remains a mystery, financial and market experts all agree that the damage wasn't repaired by canceling 21,000 trades done during a period of less than 20 minutes on May 6.

A term invented only seven weeks ago, the flash crash is a frequent subject of conversation among the more than 1,000 mutual fund industry professionals and financial advisers attending the Morningstar investment conference this week.

The experts voiced a range of opinions about its cause and consequences in presentations and in interviews with the Associated Press:

• "People were just starting to work their way back into the equity market in March and April and then this happens. And now many say they're not going back there. ... It really hasn't helped the perception of the little guy." — Mark Travis, president and CEO of Intrepid Capital Funds.

• "It did two things: It reflected the immense structural changes in the market in the last five or 10 years. And it caused even more anxiety among investors. The quicker we can understand that this isn't going to happen again, the better off we will be." — Bill McNabb, chairman and CEO of Vanguard.

• "ETFs suffered disproportionately during the flash crash. No one really knows if it was a fat finger or a really bearish bet that caused it. But the algorithms broke down." — Scott Burns, director of ETF analysis for Morningstar

• "Another flash crash is less likely now" because of steps being taken by the Securities and Exchange Commission and the Commodity Futures Trading Commission. — Karen Dolan, director of fund analysis with Morningstar

The SEC is putting forward proposed new rules spelling out when and at what prices stock trades would be canceled.

There would be a series of thresholds for canceling trades when prices diverge from the last sale before pricing was disrupted.

The higher a stock's value, the smaller the divergence would have to be to trigger a cancellation.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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