U.S. regulators recommend steps to prevent another Market Flash Crash

On May 6th 2010 U.S. Flash Crash the Dow Jones industrial average lost nearly 1,000 points in 20 minutes starting at 2.40pm (GMT-5). It finished the day down only 3% after losing nearly 10% during the Flash Crash when the market lost over $850 billion dollars in minutes. The Flash Crash caught out the Contrarian Investor UK portfolio given I had some Dow Jones index CFD positions which closed fortunately on guaranteed stops, but I still lost several thousand pounds that day.

A committee set up by the U.S. regulator, the SEC (Securities and Exchange commision), has said that 90% of all trading is now done by high-frequency computer driven trading and a third of all trades are related to ETFs (exchange traded funds), which can add to the lack of liquidity in a market during periods of excessive market volatility. During the Flash crash, sellers overwhelmed the market with sell orders and there were not enough buyers to soak up the demand.

To prevent another May 6th debacle, the committee has recommended charging high frequency traders higher access fees during peak hours, a “limit up/limit down” system that would allow stocks experiencing rapid declines to continue trading within a narrow range of prices and a ban on “naked access” by requiring that all direct access order routing to the market to occur through a registered broker.