Tags: Flash | Crash | repeat | 2012

Flash Crash Threatens Repeat Appearance in 2012

Sunday, 01 Jan 2012 09:35 AM

The Flash Crash of May in 2010 — when the Dow dropped hundreds of points and then regained it within minutes — could repeat itself in 2012, experts say.

Nobody knows exactly what caused it and investigations and studies continue, but with global volatility roiling markets thanks to ongoing political bickering, the European financial crisis and Mideast unrest, a repeat performance could be even worse than the one that scared markets in 2010.

"The true nightmare scenario would have been if the crash’s 600-point down-spike, the trillion-dollar write-off, had occurred immediately before [U.S.] market close," conclude Dave Cliff, formerly a financial trader who now runs the U.K. government’s Large-Scale Complex Information Technology Systems project, and Linda Northrop, who runs a similar project at Carnegie Mellon University, the Financial Times reports.
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"The only reason that this sequence of events was not triggered was down to mere lucky timing ... the world’s financial system dodged a bullet."

While fundamental reasons such as weak economic numbers or poor corporate earnings didn't spark the flash crash, technical factors may have played a role and markets need to approach the vulnerability in a way the military protects its Information Technology systems in the event of attack.

Some blame the growth of high-frequency traders as part of the reason for the flash crash.

High-frequency traders use complex and high-tech mathematical models to buy and sell securities within nanoseconds and reaping profits in the process.

And with more investors yanking their money out of traditional mutual funds and giving hedge-fund and high-frequency traders more visibility in the process, expect more volatility in 2012.

Still, that doesn't mean one should abandon stock markets altogether.

Fundamentals will direct the movement of many stocks next year, especially in the U.S., where the economy is showing signs of improving.

And for those willing to stick their toes back into equities markets after spending time on the sidelines, start out small, says Shawn Kravetz, president of investment management firm Esplanade Capital, according to Reuters.

"You should start to deploy capital into the stock market gradually and, in the coming months if it's up, you keep doing it. If it's down, you get a little bit more aggressive," says Kravetz, who favors large retailers, including Lowe's, Target and Wal-Mart.

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The Flash Crash of May in 2010 when the Dow dropped hundreds of points and then regained it within minutes could repeat itself in 2012, experts say. Nobody knows exactly what caused it and investigations and studies continue, but with global volatility roiling markets...
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Sunday, 01 Jan 2012 09:35 AM
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