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Band-Aid for Flash Crash

by Vicky Ku
Eyes On Wall Street |

On May 6, beginning at approximately 2:30 p.m., the stock market plunged 1,010 points in just 16 minutes. In what is now being called the "Flash Crash," the Dow plummeted 998.50 points, the biggest intraday drop in the history of the index. During the brief drop, at least eight stocks in the Standard & Poor's (S&P) 1500 index fell to a price of one cent per share - essentially a 100% decline. Although the market quickly rebounded, the speed of the plunge left Wall Street stunned and concerned.

On May 18, the Securities and Exchange Commission and U.S. Commodity Futures Trading Commission issued a preliminary report on the flash crash, in which the regulators stated that they had not yet been able to determine any definitive cause for the incident. However, the report suggested that the crash had been accelerated by a lack of uniform rules to slow or halt trading in extremely volatile stocks.

Despite the lingering mystery over the crash's origins, the SEC and CFTC are wasting no time in putting temporary safeguards in place to prevent similar trading crises. They announced a six-month pilot program, starting June 14 and ending December 10, that will create trading "circuit breakers" for the stocks listed in the S&P 500 index. The circuit breakers will pause trading in those stocks for five minutes if share prices move by at least 10% --whether up or down--in a five-minute period. This band-aid will have will have to suffice until the real causes of the crisis are better understood.