Abstract: No-Brainer: Thought vs. Rationality in the May 6 "Flash Crash"

Rosalie Genova

Abstract

The "Flash Crash" of May 6, 2010, was an abrupt nosedive, followed by a sharp rebound, in the equities markets. In twenty minutes total value fell by over 5 percent, and then recovered. Initial suspicions of a "fat finger" error, or cyber-terrorist attack, were more comforting than the actual explanation: runaway price signaling between the algorithms that dictate most trading today. It was framed as a crisis in automation, suggesting subjective human judgment could prevent such volatility. Yet subjective human judgment, and the errors associated, were exactly what automated trading was designed to circumvent. Furthermore, the Flash Crash demonstrated that computers can succumb to their own model of investor "panic." In this paper I use congressional hearings, regulators' reports, and media coverage in a case study on this dilemma. Comparisons to the 1987 crash highlighted ambiguities in technological and regulatory advancements since. Furthermore, the NYSE maintained relative order compared with younger, electronic platforms, presenting another component of trading history—"Big Board" hegemony—as preferable to the cutting edge. Officials and executives reprised perennial anxieties that progress and expansion always come at a price. I conclude that the current degree of automation in trading, and its potential for catastrophic malfunction, may increasingly influence people's investment decisions.