| HFT didn't cause the flash crash, but neither did that mutual fund manager. The primary cause was a delay in when incoming orders were time-stamped by the NYSE. Instead of stamping the orders when they arrived at the queue just before entering the market, the NYSE servers time-stamped them when they _left_ the queue and were placed in the book. Since the queue was delayed by extreme volume (NYSE has always lagged on technology), stale prices were posted to the NYSE feed. However, it was impossible to tell that they were stale from the timestamps. Since the market was falling rapidly, this resulted in the NYSE quoting higher prices than every other market. Since the NYSE was quoting higher prices than every other market, arbitrageurs massively sold at the NYSE and bought on other exchanges. Since the queue was delayed, however, the sell orders at the NYSE took a while to actually show up in the book. Meanwhile, more sell orders were placed. Want to see something scary? Here's the result: http://www.nanex.net/20100506/FlashCrashAnalysis_Part3-1.htm... |