The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Flash Crash

If you think these regulatory issues are too obscure to concern individual investors think back to the so-called flash crash of May 6, 2010. This one-day event seems innocuous compared to the more destructive credit crisis, or Europe’s economic problems, but the flash crash personifies the realities of the modern market and shows how challenging it is for regulators to address that which occurs right under their noses.

On May 6, at 2:32 P.M., with one hour and 28 minutes left before the stock market closed, the Dow Jones Industrial Average began to plummet. In about 20 minutes, the Dow fell some 1,000 points, losing 9 percent of its value. Over 20,000 trades, in more than 300 securities, were executed at prices more than 60 percent away from the price they had traded before the crash. Some people bought and sold stocks for a penny or less or as high as $100,000. Procter & Gamble’s stock fell to $39.37 from $60 in about three-and-a-half minutes. 3M fell to $68 from $82 in about two minutes. As the market declined, no one knew what caused the decline. Not the New York Stock Exchange. Not the NASDAQ stock market. Not the SEC. The stock market closed that day down 347.87 points. Six months after the crash, reasons emerged. A trader at Waddell & Reed, a mutual fund company, entered an order at the Chicago Mercantile Exchange to sell 75,000 e-mini Standard & Poor’s 500 Index futures contracts. The trade was worth $4.1 billion. The selling immediately cascaded into the stock ...