Definition of Flash Crash
A flash crash is when market values drop sharply in electronic trading over a short period of time. Flash crashes typically occur due to a very large volume of trades, combined with the automatic reactions of trading algorithms. The original flash crash occurred in 2010, and there have been several other cases since then. Generally, a flash crash does not lead to a recession, but it can be enough to trigger a recession if the crash occurs at the wrong stage of the business cycle.
How Does a Flash Crash Occur?
A very large volume of trades can typically lead to a flash crash. Trading algorithms worsen any crash. These “robots” use algorithms that recognize anomalies, such as sell orders. They automatically react by selling their holdings to avoid further losses.
These programs sell automatically according to their code when a global event or computer glitch tells them that something unusual is happening. These programs make trading more intense, increasing risks.
The concern is that one of these crashes could trigger a recession. A typical stock market crash indicates a loss of confidence in the economy. When confidence is not restored, it leads to a recession. Investors usually recognize that a flash crash occurs due to a technical glitch, not a loss of confidence.
However, a flash crash can lead to a loss of confidence if it lasts long enough to cause concern. It will also destroy investor wealth. It may even scare consumers into buying less if it lasts long enough. It can be enough to trigger a recession at the wrong stage of the business cycle.
Some Past Flash Crashes
Several flash crashes have occurred in the current millennium.
Cryptocurrency Flash Crash of 2017: On June 22, 2017, the price of Ethereum fell to 10 cents from around $319 within seconds on the Global Digital Asset Exchange (GDAX).
European Stock Market Flash Crash of 2022: Citigroup took responsibility for a flash crash that occurred on May 2, 2022, which caused a sudden drop in certain European stocks. Apparently, a trader made an error when entering a trade (hence the name “fat finger crash”), but then Citigroup recognized the mistake and corrected it.
New York Stock Exchange Flash Crash of 2015: Trading on the New York Stock Exchange was halted for three hours and 38 minutes on July 8, 2015. Trades were quickly shifted to 11 other exchanges, including NASDAQ and BATS, as well as several “dark pools.” The New York Stock Exchange lost 40% of its trading volume as a result.
Bond Flash Crash of 2014: On October 15, 2014, the yield on 10-year Treasury bonds fell from 2.02% to 1.86% within a few minutes. It quickly bounced back. The drop made it appear like a sudden spike in demand for these bonds. Bond yields fall when prices rise. It was the largest daily drop since 2009. Trading volume was double the normal value.
Dow Jones Flash Crash of 2010: The Dow Jones Industrial Average dropped by 1,000 points within 10 minutes on May 6, 2010. This was the largest point drop ever, costing $1 trillion in stocks.
Other Flash Crashes in NASDAQ in 2013: NASDAQ is known for flash crashes. Trading was halted from 12:14 PM to 3:25 PM EDT on August 22, 2013. One of the NYSE’s computer servers could not communicate with the NASDAQ server that provides stock price data. Despite several attempts, it could not resolve the issue, and the overloaded server at NASDAQ crashed.
Is
Is the Stock Market Fake?
Michael Lewis, author of “Flash Boys,” stated that the existence of high-frequency trading programs means that the individual investor cannot get ahead. These programs take massive amounts of data and make decisions and trades in a fraction of a second before a human can do so. Companies that use them, like Goldman Sachs and JP Morgan, have not lost a trade in years. Lewis claims that the stock market is fake for the average investor.
Lewis defended his research to the CEO of BATS, the second-largest exchange behind the New York Stock Exchange, on CNBC. It is a fully electronic exchange like NASDAQ, but larger.
How Does It Affect That
Source: https://www.thebalancemoney.com/what-is-a-flash-crash-3306184
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