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Dark Pools and High Frequency Trading For Dummies by Jay Vaananen

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Chapter 13

The Ins and Outs of Flash Crashes

In This Chapter

arrow Understanding how flash crashes happen

arrow Looking closer at the flash crash of 2010

arrow Analysing a flash crash

Markets have become faster and faster during the past decade and so have market crashes. Crashes in individual stocks, indices and whole exchanges can happen so fast that they’re over in a flash, which is where the term flash crash comes from. These crashes can happen in a matter of minutes, seconds or even milliseconds, faster than your eye can spot them. Flash crashes are a sudden drop in the price of a stock or index. Often the cause of these crashes is attributed to algorithms, either going wrong because of faulty computer programming, or because of human error.

You certainly don’t want to be on the receiving end when a flash crash happens, so having a handle on what they are and how they happen is imperative for you. This chapter explains how flash crashes occur. I focus on how the greatest flash crash of all happened in 2010. You can also find out how you can analyse a flash crash after it has happened so you can avoid getting caught up in one in the future.

Grasping How Flash Crashes Happen

A flash crash is ...

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