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Posted on 21 May 2011 | 3,888 views

Splash Crash Will be Catastrophic Compared to Flash Crash Stock Market Plunge

One year after the “Flash Crash” that rattled the markets worldwide the Securities and Exchange Commission still has a long way to go to make sure such a major “Stock Market Plunge” doesn’t happen again, academics and other analysts said.

A trillion dollars in equity vanished in minutes, as stock futures, exchange-traded funds and equities plunged. I’ve recently heard from a computer-trading expert warning of the very real possibility of a more widespread and catastrophic “Splash Crash,” a dislocation by high-speed trading computers that could simultaneously splash across many more asset classes and markets.

The possibility of a Splash Crash nightmare springs from John Bates, the Chief Technology Officer of Progress Software (Ticker Symbol: PRGS), a $1.89 billion company whose worldwide headquarters is in Bedford, Mass. Bates has an impressive resume, including a doctorate in computer science from Cambridge University. He’s also a member of a panel of technology experts that advises the Commodities Futures Trading Commission.

Markets are ill-prepared for a high-speed trading disruption that might simultaneously affect stocks, commodities, bonds and other assets.

A future Splash Crash might be the result of simple operator error or the unintended consequences of technological complexity. Regulators and the Justice Department are employing pattern-recognition software in an attempt to differentiate deliberate acts from innocent mistakes.

Other market experts agree that a bigger Flash Crash is possible and warns that fixes like the circuit breakers are Band-Aids — even if regulators had their 10% limit-up/limit-down circuit breakers in place for all stocks, the market could still drop 10% in a matter of seconds or minutes.

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