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Posted on 21 May 2011 | 7,027 views

Mini Flash Crashes Occurring Daily

Mini Flash Crashes are still occurring routinely with individual stocks, a sign some of the problems that contributed to the short-circuiting of the markets more than a year ago are still happening. Despite efforts to prevent another flash crash, regulators and markets have moved to implement safeguards.

Yet, traders and market observers are still seeing individual stocks and ETFs suffer “Flash Crash” like events, when stocks fall suddenly for no reason like the infamous day on May 6, 2010 when the Dow Jones industrials fell roughly 900 points, only to quickly recover and quickly rebound, suggesting many of the underlying problems haven’t been solved. Many traders claim the complacency has made it worse.

Collecting precise data on these mini flash crashes is difficult, as they often occur in the blink of an eye due to rapid-fire electronic trading. Finding them requires processing billions of trades and some of the trades, but not all, are ultimately canceled.

Neither the NASDAQ or the New York Stock Exchange discloses statistics on when trades are canceled for being erroneous and the amount of data that must be crunched is so immense that there is a several-month delay for outside observers to tally the total number of bad trades.

The most recent data available are for the first month and three days of 2011. In that period, “Mini Flash Crashes” in stocks showed perplexing moves in 139 cases, rising or falling about 1% or more in less than a second, only to recover — there were 1,818 such occurrences in 2010 and 2,715 in 2009.

Recent Flash Crash Examples:

• RLJ Lodging Trust (Stock Symbol: RJL) was an initial public offering (IPO) on May 11, 2011 when it opened at $17.25 its first day, then a number of trades at $0.0001 took place in less than a second before the stock recovered. The trades were later canceled, but it’s an example of exactly what is not supposed to happen anymore.

• Enstar (Stock Symbol: ESGR), an insurer, fell from roughly $100.00 a share to $0.00 a share, then back to $100.00 in just a few seconds on May 13, 2011.

• Ten exchange traded funds offered by FocusShares short-circuited on March 31, 2011. One, the Focus Morningstar Health Care Index, opened at $25.32, fell to $0.06 and then recovered — the trades were canceled and no one knows how frequently this is happening.

• Health care firms Pfizer (Stock Symbol: PFE) and Abbott Labs (Stock Symbol: ABT) experienced the opposite of a flash crash on May 2, 2011 in after-hours trading. Abbott shares jumped from $50.00 to more than $250.00 and Pfizer shot from $27.60 to $88.71, both in less than a second — the trades were canceled.

The exchanges have attempted to remedy these situations by halting some stocks if they fall 10% or more in a short period but some stocks aren’t covered and there are exceptions to the circuit breakers that even confuse many traders. Also, “Erroneous Trades” can only be reported in the first hour after they happen, so if they aren’t caught quickly, investors can lose out.

Many of the inexplicable moves by stocks were due to erroneous orders that originated outside the NYSE — errors have always been part of financial markets, yet after the flash crash, there’s more attention being paid to errors and more sensitivity toward them, he says. Such extreme volatility is the tradeoff for fast electronic markets, and it’s up to investors to know how to protect themselves.

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