The One Huge Mistake That The NASDAQ And NYSE Made After Thursday's Crash

duncanneideraur

Politicians will be holding a hearing today about last Thursday’s flash crash.

In a piece over at The Big Money, Heidi Moore expresses optimism that the hearing might do some good and advance our understanding of what happened. We’re sceptical. We’re probably going to get a lot of bloviating, and that’s it, but you never know.

In her piece “Glitch Craft” Moore lists five big questions about last week’s big move, including what we think is the really important one: Why did the exchanges cancel trades if they insist there was no glitch?

This question hasn’t been asked enough, and the more we learn, the more it seems like a real blunder.

Kid Dynamite has a great post on the subject, which concludes that the only possible justification for cancelling trades is to bail out mum & pop retail investors who might have made a market SELL order at just the wrong time. Other than that, cancelling trades sets a horrible precedent, for it’s strongly discouraging any players that might step in during a panic and buy. As noted by several others, anyone who bought during the dip and sold during the rebound was inadvertently forced into a short position after hours, when the first half of the trade was wiped out.

Hopefully some of the market structure issues at play here (namely bids leaving the NYSE for electronic exchanges where buyers disappeared) can be resolved, but if this happens again, the message is clear: don’t stick your neck out and by during a panic dip.

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