In the SEC’s quest to uncover the genesis of the May 6th “Flash Crash”—the day the Dow Jones plummeted 700 points in record time and planted the stomach of every investor in the country firmly in their throat—high frequency trading firms are continuing to come under close scrutiny. This is despite the fact that it still cannot be proven one way or another that high frequency trading volume was the cause.
One of the things the SEC is looking at is the practice of quote stuffing, which describes the tactic of entering large trade orders only to withdraw them almost instantaneously. This practice is said to result in the distortion of stock prices and the slowing down of electronic trading networks—which can be responsible for declining volumes and giving the advantage to individual traders to sell at artificially low or high prices.
But this latest assumption could turn out to be a rush to judgment against the favorite punching bag of regulatory organizations—high frequency trading firms. It’s been suggested by some that the “Flash Crash” was actually the result of delayed NYSE quotes. In a glitch that’s been traced to the 6th of May, stock quotes exiting the queue were being time stamped with the time of their exit, instead of the time of their creation—causing a confusion among the algorithms that developed into a full-blown vicious cycle.
This latest insight may not solve the riddle of the May 6th “Flash Crash,” but it does shed light on the fact that laying the blame squarely on the existence of HFTs, rather than the practice of quote stuffing, could be the equivalent of throwing the baby out with the bath water.
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