Splash Crash next?
Remember last year when the market dropped 10% in a matter of minutes. SPX futures traded with 10 handles spread, stocks would move 10, 20, 30% in a couple of minutes. That was the Flash Crash. Next up is the Splash Crash, another crash, but this time involving all correlated assets, equities, currencies, commodities and bonds. Below from Barrons;
Last year’s Flash Crash was a hair-raising experience for stock and commodities investors—comparable to the sudden descent of a large airliner from 38,000 feet to tree-top level, followed by an equally sudden and steep ascent.
A trillion dollars in equity vanished in minutes, as stock futures, exchange-traded funds and equities plunged. I’ve recently heard from a computer-trading expert warning of the very real possibility of a more widespread and catastrophic “splash crash,” a dislocation by high-speed trading computers that could simultaneously splash across many more asset classes and markets. Imagine our metaphorical jet buried in the earth up to its tail.
Oversight of robotic trading is so slight that regulators have little idea of itsimpact. Progress Software’s Bates frets that, absent more oversight, terrorists wielding the smart machines could attack the markets in an attempt to cripple our economy. Regulators counter that it would be much more difficult for hackers to infiltrate a stock exchange than, say, a company like Sony (SNE), the recent victim of a crippling criminal cyber attack. But it isn’t impossible. Imagine an agent working for a foreign government infiltrating a firm that owns robots and infecting one or more of the machines with a malicious virus.
“You almost need something like a Norad [the joint U.S.-Canadian North American Aerospace Defense Command]… for the markets,” Bates says. Because some 15% of the U.S. economy is based on financial services and the markets, they should be protected on the basis of national security, he asserts. This is arguable. Other experts opine that the Securities and Exchange Commission is more lacking in manpower than technology and that it could stay fairly on top of the market with a hundred more mathematicians, as opposed to a billion-dollar supercomputer.