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The May 6, 2010 Flash Crash - Essay Example
Author : legrosadelia
Finance & Accounting
Pages 5 (1255 words)
6 MAY, 2010 FLASH CRASH.
The Flash Crash of 6 May, 2010 caused titillations even amongst economic scholars. It was characterized by sharp drop and recovery of the prices of securities. In less than half an hour, the asset value of several securities collapsed…
On the contrary, the contemporary market is characterized with higher demand as compared to the supply. Financial innovations enable changes in the financial market by introducing new ways of trading assets. One of the newest financial innovations entails trading from computer to computer through use of complex mathematical algorithms that are hard for humans to comprehend. The recent financial crisis resulted in increased unemployment, which is an indicator of the increased inefficiency of the stock market. This paper agrees with Stiglitz opinion that that Flash Crash will lead to less investment in information, which is harmful to the markets price discovery function hence the financial market. The paper will oppose the opinion that Flash Crash could be a positive feedback loop of the trading environment. Computer trading has become a common phenomenon, which has increased the speed of trading making it impossible for humans to intervene in times of occurrences such as flash crash. Additionally, the explosive trading speed results in undermined efficiency since the market becomes incapable of allocating resources efficiently. Flash Crash entail trading from computer to computer through use of pre-programmed algorithms. ...