Expert Zone

Straight from the Specialists

Sharp fall in Nifty: Understanding flash crash, algo trading


(The views expressed in this column are the author’s own and do not represent those of Reuters)

Global markets have witnessed flash crashes in the recent past, the most famous one being on May 6, 2010 when U.S. markets dropped 600 points in a matter of minutes, only to recover later. But the one which we witnessed Friday on the National Stock Exchange resulted in the market being shut for a while.

Generally, algorithmic (algo) trading is associated with flash crashes as unlike a manual trader, the software logic doesn’t have the mind of a human. With several algos at work across various brokerages, one such abnormal move activates the programme logic at umpteen algo desks, resulting in destructive market moves.

Any manual trading terminal having such huge limits are manned by experienced dealers with enough safeguards, hence I was a bit flabbergasted when it was reported that the NSE flash crash was due to manual error and not due to algo-related orders.

  • Editors & Key Contributors