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CNNMoney: A Dozen Mini Flash Crashes Hit Stock Market Daily

By Michael Kling   |   Thursday, 21 Mar 2013 08:06 AM

At least a dozen mini flash crashes are roiling stocks every day, traders say.

In flash crashes, a stock price plummets swiftly, and then rebounds just as quickly, all in a matter of minutes or even seconds. Automated trading programs using advanced algorithms are blamed. The mini crashes underscore the stock market’s vulnerability to automated trading programs.

Dennis Dick, a proprietary trader at Bright Trading in Detroit, told CNNMoney he stopped counting flash crashes because they have become so frequent.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Flash crashes have hit such market stalwarts as Apple, Berkshire Hathaway, Aon and apparel maker Hanesbrands, according to CNNMoney.

For instance, Apple fell almost 2 percent in the last minute of trading on Jan. 25. About a million shared traded, almost 10 times the volume of any other time that day.

Hanesbrand’s stock fell 3 percent in less than half a second, then popped back, on Feb. 5. U.S. Silica Holdings, an industrial products firm, dropped 9 percent in less than two seconds on Feb. 14.

On May 6, 2010, the entire market briefly dropped in a flash crash. The Dow Jones Industrial Average fell nearly 1,000 points before quickly rebounding. Regulators blamed an unnamed large investor’s automated trading software that was programmed to sell futures contracts.

Since then, stock exchanges and the Securities and Exchange Commission (SEC) introduced circuit breakers to stop trading after extreme price swings. A move of 10 percent will automatically stop trading in the stock for about five minutes.

“Circuit breakers don’t prevent the initial problems, but they prevent the consequences from being catastrophic,” Greg Berman, the SEC’s associate director of the Office of Analytics and Research, told CNNMoney.

The SEC is still working on the problem.

Starting in April, trading in a stock will halt for 15 seconds if its price veers too far from its last price, CNNMoney noted. If trades don’t return, to its normal range, trading will wait for another five minutes.

SEC commissioners recently voted to write new rules for standards and testing of automated trading systems. Companies would be required to frequently test their systems, meet technology standards and inform the SEC of any problems found.

“While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimize their impact on our markets and ultimately investors,” said SEC Chairman Elisse Walter in a press release.

Proposed rules, she said, would “provide more explicit technology and control standards to help ensure that our markets remain resilient against technological vulnerabilities.”

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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