Top 3 Financial Crashes Caused by High-frequency Trading Algorithms

In the financial world, high-frequency trading has become the new norm. By using trading algorithms and dedicated tools, stock market players can execute trades in milliseconds. The ultimate goal is to increase profits in a near-automated way. However, there have been some notable issued with high-frequency trading in the past, all of which have caused significant financial losses in the process.

3. 2010 Flash Crash

Although flash crashes are nothing new in the world of finance and trading, 2010 stands out as a peculiar year. On May 6 of 2010, the US stock market crashed and remained inaccessible for a total of 36 minutes. All stock indexes collapsed and rebounded in quick succession. This day marks the second-largest Intraday point swing recorded up until that moment.

The cause of this crash took some time to pinpoint. As it turns, high-frequency trading algorithms were driving the bids on dozens of ETFs and other stocks as low as one penny per share. Navinder Singh Sarao was eventually convicted for his role in the 2010 flash crash, as he used a spoofing algorithm to cause the crash. He set up thousands of futures contracts, which were refreshed roughly 19,000 times before eventually getting canceled. It is this type of high-frequency trading algorithm that caused the brief crash.

2. Knight Capital

Clever maths and powerful trading algorithms can be both a blessing and a curse. For Knight Capital, a company looking to unveil its new trading program to link with up the electronic New York Stock Exchange platform, it turned out to be a fatal curse. Once the market opened in August of 2012, and Knight Capital prepared to run their software, it became evident something was horribly wrong. At first, the team was unclear as to what caused the issue.

Once the software was switched on, Knight Capital started bleeding money left, right, and center. The company lost US$10m every single minute by buying stocks high and selling them low. Unfortunately for the company, this problem persisted for over 45 minutes, eventually resulting in a US$5440m net loss. Even though a team of human traders was watching the software do its thing, it took them nearly an hour to bring everything to a halt.

1. Peet’s Coffee and Tea

One could argue the year 2012 was not the best for high-frequency trading tools. The NASDAQ, together with all other trading platforms listing the Peet’s Coffee and Tea shares, halted trading of his stock due to an unprecedented sharp price rise. The share price jumped as much as 5% right after the electronic stock exchange opened. This immediately raised concerns and warranted an investigation.

It is widely believed high-frequency trading algorithm caused this sharp stock price increase, albeit no one ever unveiled the real cause of the problem. NASDAQ was forced to cancel all trades at or above US$76.11 executed between 9.31am and 9.32am of that trading day. One thing is for sure, high-frequency trading has been frowned upon ever since this incident, as it occurred just a month after the Knight Capital issue.  

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