Econintersect: In just a few minutes Friday (05 October 2012) the value of the primary share index (called the NIFTY) for the National Stock Exchange (NSE) in Mumbai (Bombay) declined by 16%. This latest flash crash was another case of an instabilty being triggered by computer trading algorithms reacting to 59 wrong orders from a single brokerage. Trading on the exchange was halted for 15 minutes while the problem was sorted out.
A human mistake was made (apparently – the NSE said human error was the cause) with the 59 original orders and the crash ensued when high frequency trading computer algorithms reacted to what appeared to the programs to be “market imbalances”. It seems to Econintersect that the algorithms must have assumed that triggers would result only from rational market behavior and not from errors. When they encountered “irrational conditions” the computers lost connection to reality and mayhem ensued.
On a percentage basis, this index crash was much larger than the 10 May 2010 event on the NYSE (New York Stock Exchange) which saw a decline in a few minutes of 9% for the Dow Jones Industrial Average (DJIA). Since the DJIA is not a capitalization weighted average the dollar value of the plunge is not easy to determine from the decline of the average, but it was very likely in the $200 billion to $300 billion range, much larger than the $60 billion crash seen for the Nifty today.
In both cases the flash crash damages were quickly repaired and both days ended with only modest changes in the averages.
But there is concern that one day there may be an endemic explosion of such a flash crash event and it could spread into multiple markets. From an article in The Guardian:
Joseph Saluzzi, co-founder of US agency broker Themis Trading, said: “We look at it as minor earthquakes and what they build up to is one much bigger earthquake, which could be an entire global market breakdown.”
The NSE blamed Friday’s crash on human error but Saluzzi said that was highly unlikely. “There is no human being in the world that can take down the stock market by 16%. This is typical spin.”
He said any error was probably exacerbated by high-frequency trading, which involves using software to post orders for microseconds at a time to exploit tiny differences in share prices.
It is now widely accepted that high-frequency trading fuelled the flash crash of May 2010, which saw the Dow Jones industrial average plunge by 998 points in 20 minutes, raising fears of a worldwide stock market collapse.
Concern about high-frequency trading has increased in recent months, with European legislators moving to limit the practice. The European Parliament voted last month to force trading venues to slow the speed with which orders can be made. Under the proposed law, share orders would have to be posted for at least a half-second, far longer than high-frequency traders now stay in the market. The German government has also approved a draft bill aimed at reining in the practice.
- NIFTY Chart (NSE website, 05 October 2012)
- Glitch wipes nearly $60 billion off Indian stock index (Josephine Moulds, The Guardian, 05 October 2012)
- 2010 Flash Crash (Wikipedia)