There is nothing quite like a 900-plus point drop in the Dow Jones Industrial Average to get your attention, and that is exactly what happened during the stock market crash in 2010. Also referred to as the Flash Crash, the Dow had an astonishing 1,010 point swing, and a record setting 998.5 point one day drop.
The circumstances surrounding this Flash Crash- so named because the crash lasted a mere twenty minutes – remain unclear, although many theories have been brought forth including the “Fat Finger” theory, and aggressive selling by high-frequency traders.
While hindsight has not yielded any clear answers, there are many lessons to be learned from the May 6th Flash Crash, and ways to safeguard your portfolio from stock market crashes – even one’s that last only twenty minutes.
The Stock Market Crash In 2010: Fat Fingers, Liquidity, And High-Frequency Trading
In the aftermath of the stock market crash in 2010, experts tried to pin point the cause of the extreme volatility seen on that day. While the markets had been trending lower earlier in the day on debt concerns stemming from Greece, there appeared to be no reason for the 900 point drop and subsequent rebound that left investors with a case of whiplash.
One theory emerged, and was disproved was the so-called “fat-finger” theory, where an excessive large sell order was placed inadvertently for Proctor & Gamble stock, setting off a chain reaction of sell orders in the market. This theory was eventually disproved as it was shone that a decline in the E-mini S&P futures contracts preceded the decline in Proctor & Gamble stock.
A joint report released by the Securities and Exchange Commission and the Commodity Futures Trading Commission indicated the problem that exacerbated the Flash Crash was the aggressive selling by high-frequency traders in the face of market uncertainty.
While analysts are unclear as to the true extent of the impact high-frequency trading had on the crash, it has been hypothesized that these traders contributed to both the downward and upward momentum of the market during the crash.
The evaporation of liquidity in the stock market has also been blamed for the Flash Crash, brought about by changes to the stock market including increased competition, the lack of specialists in charge of keeping order in the market, and too many moving parts to ensure a fair and orderly market.
How To Survive A Crash Like The Stock Market Crash In 2010
While there is no way to guarantee that we never see another harrowing plunge like during the stock market crash in 2010, there are steps you can take to safe-guard your portfolio in the even of extreme volatility.
Ask to see your brokerage’s “best practices” on how trades are executed. Educate yourself on what circuit breakers, fail-safes and any other additional protective measures that are in place to guard against another crash of this type. Also find out how any disputes are settled concerning market orders executed during a sudden crash.
It is paramount to your success as an investor to fully understand your rights, and to get all guarantees in writing before a crisis emerges.