The “Flash Crash” of May 6, which scared the bejeezus out of retail investors and illustrated just how volatile and unpredictable the U.S. stock market can be, may have been caused by rogue traders who were manipulating the market, Barron’s reports.
A computer programmer named Eric Scott Hunsader has floated a theory about the May 6 crash to the Feds. On that day, the Dow Jones Industrial Average fell 700 points in 15 minutes, an unprecedented decline. Hunsader believes that traders are deliberately causing tiny delays in the flow of pricing information from trading floors to people’s computer screens, and using their short lead time to cause and trade around giant moves in stock prices. “This seems right out of the movie The Sting,” says Barron’s. “If you have advanced knowledge of the market’s direction and more time to use that knowledge, you make more money.”
Stock exchanges claim they can’t duplicate the results Hunsader outlines in this scenario, and that ticker tape slows down any time an exchange sees heavy volume. But, Barron’s says the exchanges didn’t initially know that high volume slows down “the tape,” so maybe Hunsader’s right.