The recent news lowering the rate of economic growth for 2010 reminds me of the day it all turned around.
The market had been rallying for over a year when suddenly that all seemed to stop when the Dow Jones Industrial Average dropped 10% in about 15 minutes in the flash crash of May 6.
Some stocks such as Accenture and Proctor & Gamble fell over 30%. Accenture was trading at one cent. Since then we’ve had nothing but volatility within a trading range. Investors frightened by the 2008 financial crisis were just started to regain some faith in the markets when the flash crash drove them back to the sidelines.
What caused the flash crash?
Despite Congressional and SEC investigations into the matter, no one still knows. Circuit breakers put in place are designed to help prevent another one but since no one knows what caused the problem in the first place, no one knows if they will actually work. Traders primarily attribute the crash to a “fat finger” or human error, someone typing in billions instead of millions, others point to unrest in Greece setting off a wave of selling, still others blame it on the myriad of high-frequency traders working on high-speed computers, while still others think the problem lies with a myriad of electronic trading systems, that speed up the pace of market activity and lack the New York Stock Exchange’s ability to slow trading.
We should know more about what caused the pivotal plunge when the SEC and the Commodity Futures Trading Commission issue a final report on their findings in September.
Of course, the markets have gotten more complex and with increasingly high-speed technology everything seems to get more complex. But, before you get lost in the thicket of all this, there are simple realities out there that don’t necessarily change with the markets. One is that you could help protect clients against selling a stock like Accenture at one cent by placing a limit order.
Limit orders allow you to limit the price at which a stock gets sold so that you can protect clients from losing out in a flash crash. Making this a routine practice seems to make good sense. Even if the markets are so complicated, the so-called experts can’t figure out what caused the flash crash, you have a simple tool with which to protect your clients from its future occurrence. Even if the SEC or Congress figures out what happened or how to prevent it from happening again, you can rest assured that the markets will remain volatile. Placing limit orders will probably continue to be a good, low-tech solution.
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