In the spring, I took a lighthearted look at the political chaos caused by the "Flash Crash," which at the time no one could understand. Now the relevant regulators have come forward with an answer that shouldn't surprise, since it comes as a combination of my two favored theories: A single mutual fund executed an unusually large and fast sell order, and the High-Frequency Trading (HFT) computers that Wall Street firms increasingly use to beat the competition freaked out, and in five minutes everything went nuts.
Kevin Drum worries about the resiliency of the markets in an era of faster-than-human finance, but for all the chaos, it seems like a victory for regulators: An electronic "circuit-breaker," which enforces a trading pause when the markets become too volatile, seems to have stopped the flash crash and allowed markets to recover. In the wake of the upset, the SEC has expanded the number of breakers across the markets to prevent future occurrences. That said, the increasing deployment of HFTs seem to leave investors nervous, and we've all seen the consequences of financial innovation going into practice before we have a complete grasp of its consequences.
-- Tim Fernholz
