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Two years on from the Flash Crash, has much been learned?
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Ending the week with a bang.

This Sunday, of course, marks the second anniversary of the Flash Crash, that notorious day in modern trading history where the bottom fell out of the Dow Jones Industrial Average. It recovered minutes later, but the scare was enough to institute an industry-wide look at control systems and more than a little pontificating over the pointing of fingers.

The US Securities Exchange Commission's report into the incident received equal parts laud and choler, of course, and more than a few people have questioned the official version of events. For the purposes of this column, that's unimportant. Whether it was dual-trading in synthetic products that deliberately triggered the crash, bad algorithms or someone with an exceptionally fat finger, the causes and data can be argued to death. What's certain is that there were winners and losers, and some, such as Themis Trading's Sal Arnuk, have been vocal about their perspectives on these very pages recently.

Big Brother
Market surveillance and preventative mechanisms are complex processes. While circuit breakers appear to have worked well, the number of mini-crashes or single-stock dips caused by technical glitches and botched IPOs seem to indicate that these kinds of events may just be features of the modern market, rather than aberrant occurrences. Exchanges, of course, have to play their part in mitigating the possibility of crashes arguably induced by high-tech trading, but there's no fast and loose answer to how to solve it.

It's understandable, then, that surveillance is being boosted at venues, such as with Nasdaq OMX's acquisition of BWise. With the continuing drive towards cross-venue arbitrage and liquidity sourcing, though, made possible by the sheer expansion of connectivity over recent months and years, can a single-exchange solution adequately cope? Regulators apparently can't, as horror stories regarding their level of technical and human ability with properly monitoring the markets they supposedly oversee have described.

Navel Gazing
Not much in the way of good news has come out of recent times, in an economic sense. The financial crisis and subsequent sovereign debt crises have liquidated confidence in markets, and regulatory reform has been both widespread and populist. The reduction of systemic risk, however, remains an adulatory goal in capital markets. We live in times where technology is changing the foundation of how society, as well as business operates. While it throws up challenges, though, it also presents solutions in the form of sophisticated operational strategies.

It's important to step back at times and take stock of a situation. The Flash Crash, in the wider scheme of things, may not have been that important. Its overall impact in terms of real destruction has been relatively minimal. But it does provoke and engender useful comment and thought in a broad sense. Do markets exist purely to facilitate the acquisition of wealth, are exchanges just launch pads built to fire the latest technological rocket into the ether, and does responsibility end with the activation of an algo in an execution engine? Looking at market volatility and saying that it wasn't me, guv, honest, doesn't seem to cut it anymore.

I'm currently working on a wider piece regarding the Flash Crash and changes instituted since then. If you have an opinion to offer, then please feel free to call me on +44207 316 9811, or send an e-mail to james.rundle@incisivemedia.com

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