I didn’t think this was “the big one,” when the stock market utterly collapses, never to rise again. To be that severe, market jitters would have been rising in the days leading up to May 6th. Instead, market jitters had been decreasing since the market had bottomed-out 14 months previously. Still, I had to be in position to preserve as much of my clients’ wealth as possible. As I prepared to sell their stocks, I worried that I would be locking in whatever losses they had already incurred that day. Plus, I would be creating a huge tax bill for them! Sweat creased down my forehead, tracing the eyebrows into my crow’s feet and down my face. I tugged on my shirt collar to release the build-up in heat. If I sold their stocks, some clients would be happy, and some would be very unhappy. I hesitated . . . feeling this crash was not real and that reality would return.
Thankfully, the market recovered as it always has and went on to new record highs.
The SEC eventually determined that a trader had a “fat finger” and sold $4.1 TRILLION of derivatives in general and futures contracts in particular — by mistake. This caused a cascade of automated selling. Market traders immediately suspected that. But, it took the SEC four long months before they figured it out.
In the four years since the Flash Crash, the SEC has been designing a new computer system to better track the market . . . four years . . . and they still haven’t even estimated the cost, much less put the contract out for bid. Called CAT for Consolidated Audit Trail, it is not expected to function before 2018 at the earliest. (By comparison, it only took 16 months to construct the Pentagon.)
The goal of the SEC to protect the small investor is a vital part of capitalism. At some point, most organizations become too ossified or too constipated to function. I pray that is not true for the SEC, but suspect that it is! If there is another Flash Crash, don’t be surprised . . . and don’t lose sleep!