Former physicist investigates May 6 flash crash

Sep 22, 2010 by Lisa Zyga weblog
The daily chart of the Dow during the flash crash. Image credit: Wikipedia.

(PhysOrg.com) -- Ever since the "flash crash" of May 6, 2010, investors have been wondering exactly what happened that Friday afternoon. As stock markets were trending down due to concern about the debt crisis in Greece, the Dow Jones Industrial Average suddenly plunged 600 points in about 5 minutes. Then 20 minutes later, the Dow recovered most of the loss, and finished the day down more than 200 points.

Gregg Berman, a former particle physicist with 16 years of experience on , is working for the (S.E.C.) to lead a team of more than 20 investigators to find out what caused the flash crash. Over the past several months, the investigators have gathered and analyzed large amounts of data and interviewed hundreds of companies, and now plan to publish a report of their findings within the next two weeks. Although Berman isn't revealing details about the results, in an article in The New York Times he says that he found no evidence of a deliberate attempt to manipulate the markets. Instead, the investigators have identified a specific series of events that led up to the crash.

“The report will clearly demonstrate how market conditions and events prior to the flash crash led to the extreme price moves,” Berman said, adding that the overall picture may not be as simple and straightforward as many people would like.

In the weeks and months after the flash crash, a number of theories have been proposed to explain the volatile activity. One of the first theories was the “fat finger,” in which someone accidentally sold an extremely large order, triggering more selling. Another theory was that the European debt crisis had made the markets volatile, which caused some high-frequency automated trading programs to stop trading, which in turn caused confusion among other computerized programs. Regulators now consider both of these theories to be doubtful.

In contrast with these simpler explanations, Berman said that his explanation involves several factors occurring simultaneously. He explained that market participants were doing different things for different reasons, and that the varying “circuit breaker” policies of different exchanges caused a lack of coordination and confusion, all of which played a role in the crash.

The results of the report will likely be used by a group of advisers to the S.E.C. and the Commodity Futures Trading Commission to make policy recommendations. The results and subsequent policy changes may also reassure investors, who have withdrawn money from stock mutual funds every week since the flash crash.

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More information: via: The New York Times

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User comments : 13

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Bob_Kob
4 / 5 (4) Sep 23, 2010
Stock market is just one big game. A game that affects every single person..
includao
Sep 23, 2010
This comment has been removed by a moderator.
Noumenon
3.8 / 5 (64) Sep 23, 2010
It's called investing, and there is nothing wrong with it. Grow up.
Bob_Kob
3.7 / 5 (6) Sep 23, 2010
Invest into a market where for no good reason other than the complicated ramblings of a particle physicist does the values of commodities drop 600 points?

Or sorry, I should just continue to 'grow up' in America where the country goes into recession for no reason other than the greed of those at the top and drags the rest of the world with it.
Noumenon
3.9 / 5 (61) Sep 23, 2010
The market dropped those 600 points due to a glitch, which is evidenced by the fact that it quickly rose back up before causing a major panic among investors.

The country did NOT go into recession for "no reason other than the greed of those at the top" as you say, that is a simplistic view and is illogical. There has alwaysl been "greed" as you put it, yet there has not always been a recession, in fact only a very small time is there a recession, so therefore there must be another explanation;

Government interference and sub-prime mortgages was the key problem. The government set up conditions pressuring mortgage companies to grant loans to people who could not prove their ability to save 20% for down payment, and generally diluted credit qualifications, all in a naive do-gooder attempt to help the lower class buy houses. No one sane would invest in sub-prime mortgages so naturally they were packaged and sweept under the rug,... they had to go somewhere.
seb
5 / 5 (1) Sep 23, 2010
So they have AI's making constant stock trades these days? Something happens, everything crashes, and they say "oh we don't like this, let's just revert all these changes". So much for the market.

YSLGuru
4.2 / 5 (5) Sep 23, 2010
@Noumenon

And so when they wrapped up that junk paper and sold its as Derivatives and then bet against much of the junk paper they sold to their clients (that would be the biggest investment entity on the street) they were bowing to government pressure and at no time were abusing the system right?

Wake up buddy. The majority of the people playing the investment game and making the money are doing so dishonestly. You are just regurgitating pro-wall street talking points.

The Feds are certainly to blame but so are most of the crooks on Wall street.
YSLGuru
5 / 5 (1) Sep 23, 2010
I for one found this guys findings to be at best questionable and at worst an outright lie intended to squelch any further investigations. Too many of the better connected walked away from this incident making money to simply attribute it to a series of chance and or coincidental events.

To many regulators are owned (fully paid for) by the Goldman-Sachs of the world to believe they can do their job honestly. The fact that they no longer have to report to or on any investigations to Congress thanks to the supposed financial overhaul, is by itself enough to cause question on anything these guys say and do from here forward.

When the big boys like Goldman-Sachs loose so much on one of these 'coincidental series of unfortunate events' that they raise hell and demand to be bailed out, that's when I'll consider believing it wasn't rigged.
Skeptic_Heretic
5 / 5 (2) Sep 23, 2010
No one sane would invest in sub-prime mortgages so naturally they were packaged and sweept under the rug,... they had to go somewhere.
So don't put them up for investment. Fractional reserve banking is a scam born of corporatist greed. There's no need for investment if the bank has the liquidity on hand.

It goes back to greed in the end, every time.
Noumenon
3.9 / 5 (60) Sep 23, 2010
And so when they wrapped up that junk paper and sold its as Derivatives and then bet against much of the junk paper they sold to their clients (that would be the biggest investment entity on the street) they were bowing to government pressure and at no time were abusing the system right?


What you call "abusing the system", I see as an existing capitalistic mechanism already in play, with inevitable consequences and predictability. Like the phenomenon that water always seeks it's lowest level, capitalists will always seek to minimize loses and maximize profit. This powerful mechanism already existed before political button pushers over qualified home buyers, and let the bull into the China shop. This was unnatural and dishonest to the system, .. it was dishonest that people of a given credit worthiness should qualify for a home of xxxx value.

Regarding Fractional reserve banking, that's what a FDIC is for.
Quantum_Conundrum
1 / 5 (2) Sep 27, 2010
Noumenon:

Exactly why is it that people think someone should be able to make millions doing little more than trading "paper", while people with actual "real world" job skills work for an average of 44k per year in this country?

To me, the majority of Wall Street is little different than mobsters or racketeering and money laundering. In a very real sense, its actually counterfeiting money.
Noumenon
4 / 5 (59) Sep 27, 2010
...should be able to....

Because it's a free country. Simple. The question is, what business is it of yours what someone else has or does.
zslewis91
5 / 5 (1) Sep 30, 2010
...should be able to....

Because it's a free country. Simple. The question is, what business is it of yours what someone else has or does.


@!Noumenon

i would suggestion reading one of Noam Chomsky's books...it sounds like your very sure of things that no mans sure of. my b.a. economics qualifies me to speak. you, like many others, have no room to speak.i say if you cant expressed mathematically. you should keep the garbage dripping from your fingertips in the junk bin you call a mind.

your god and lord.
nycsoon
not rated yet Nov 05, 2010
Golden Networking is organizing the High-Frequency Trading Experts Workshop 2010, “Practical Implementation of High-Frequency Trading Strategies," on December 9th and 10th in New York City. It has been recommended for executives in finance and investments who work at Investment Banks, Hedge Funds, Pension Funds, Broker Dealers, Consultancy Groups, Prime Brokers, Solution Providers and Exchanges and wish to gain a thorough understanding and practical knowledge of high-frequency trading.

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