Last May, the Dow Jones Industrial Average plummeted by nearly 1,000 points. Only 20 minutes later, however, the market rebounded and recovered most of its losses. The second-largest swing and largest-ever one-day decline is now known as the flash-crash.
While some experts have offered explanations as to how the market swung so widely on one day, none have come to an agreement regarding the occurrence. Many experts believe the crash was a result of high-frequency traders, hence the event earning the nickname the flash-crash. However, even if this was the doing of high-frequency traders, more questions still remain, such as the what these traders did to cause it and if these problems have been fixed.
Currently, high-frequency trading has been met with increased opposition and has slowed in general. Some experts, such as France's finance minister, Christine Lagarde, have moved to ban the practice altogether.
Using algorithms, high-frequency traders buy and sell stocks in rapid movements, earning and accumulating the small amount made in each transaction. Those against the practice argue it to be unstable. Now, instead, experts have proposed using fixed-income instruments in order to improve the market's transparency and governance within transactions.
However, as a recent eFinancial News article relays, doing so could present a potential chain reaction that could result in another flash-crash and rapid point swing. Approaching the market with extreme caution might be advised for the next several months as a result.
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