For many market participants, the flash crash of May 6, 2010 — in which the Dow Jones Industrial Average plunged nearly 600 points and then quickly bounced back — remains a touchstone, invoked after each subsequent market glitch, from the botched IPOs of Facebook and BATS Global Markets to Knight Capital’s rogue software.
The crash brought into stark relief some of the risks and dangers of high-speed trading in today’s highly interconnected markets and revealed the limitations of regulatory oversight at the time for algorithm-based and high frequency trading activity. But after a joint investigation and report into the crash by the Securities and Exchange Commission and the Commodity Futures Trading Commission, many argue that the true story of the flash crash remains untold.
One vocal example is Dutch filmmaker Marije Meerman, whose documentary on the crash, entitled Money & Speed: Inside the Black Box, originally broadcast on Dutch television, is now available as an English-language version on YouTube. According to Meerman, though the documentary was first released in January 2011, several months after the flash crash, it raises questions that remain relevant today: Why did the SEC/CFTC report conclude that just one firm (later named as Waddell & Reed) was responsible for the trading that caused the crash, when a more minute analysis shows contrary findings? Who was buying at the absolute bottom of the market during the crash? And could a flash crash be deliberately engineered to create arbitrage opportunities from today’s lopsided technical infrastructure, allowing some firms to get market information before others?
“I thought information about this event would be made clearer so much sooner,” Meerman tells Institutional Investor.
To try to revisit the events of the flash crash, the film — approximately 50 minutes in length — uses a combination of striking visuals, colorful data, edgy music and interviews with market players including Rishi Narang, founder of California-based quant firm T2AM; technology historian George Dyson; Gregg Berman of the SEC’s Division of Trading and Markets; Paul Wilmott, a consultant and lecturer in quantitative finance; Willam Black, an associate professor of economics and finance at the University of Missouri; and Eric Hunsader, founder of Winnetka, Illinois–based market data firm Nanex.
One of the key moments in the film comes from Nanex’s Hunsader, who challenges the government report’s attribution of blame for the May 6 market drop. Drawing from his own data, Hunsader claims the two agencies got it wrong by failing to analyze the data on a millisecond-by-millisecond basis. He points out that their report aggregates information in chunks of time too big to give a full and accurate picture of events surrounding the crash. “The time stamps hid the delay,” Hunsader says in the film, and he goes on to cast doubt on the report’s conclusion that just one firm was responsible for the crash.
Today Hunsader tells Institutional Investor he believes the film remains relevant. “We still don’t know who the other players were in the market, but we now know that everything the SEC said about the flash crash is wrong,” Hunsader says.
Two years after the documentary was first broadcast, the SEC’s Berman concedes that its central point — that some elements of the crash remain unknown — remains valid. Berman tells Institutional Investor that “it’s foolish to say that every and all questions about the flash crash have been answered.” But, he goes on to explain, “on the equity side, we have a very good understanding of what happened to cause prices to dislocate to a penny, or for very large stocks to have dropped 20, 30, 50 or 100 percent,” though he points out that the film does not talk about what happened in the futures market or the CFTC side of the report. He also notes, since the crash, “we’ve spent the past few years on a number of rules and regulations designed to prevent this from happening again.”
Not everyone agrees that the flash crash remains a valid topic for study. Narang of quant firm T2AM reckons that while the film does a “decent job” of providing multiple perspectives on the event, he views the ongoing speculation as “a tempest in a teapot.” He tells Institutional Investor that the flash crash has had no real impact on the markets. “It’s not the first flash crash,” he explains. “It wasn’t caused by high frequency traders. It wasn’t made any worse by high frequency trading than it would have been made by human market makers in the old days. The May 1962 Flash Crash kind of proves that fact.” Instead, Narang thinks it might be more productive to explore why flash crashes continue to happen under different and varied circumstances, rather than being focused on this one event.
For Meerman, this project has led her to conclude that the public still does not have the full picture about the market events of May 6, 2010. “The film shows how it’s not in the interests of some for there to be a clear picture of what actually happened during the flash crash,” she says. Meerman adds that she now believes that anyone trading in today’s markets without the benefit of cutting-edge technology and high-speed computers will always be “too late” for what has evolved into “an unfair race.”
