Today, a top Bank of England official said that flash crashes that send shares plunging on the back of high-speed computer trading are not a problem for markets.
The Bank’s executive director for markets, Chris Salmon, claims that the increase of high-frequency traders has, overall, been a good thing. While the super-fast computers that manage to trade on momentum — they follow markets up or down — have been criticized for sudden market slumps, Salmon believes they have benefits.
“Though flash crashes are headline-grabbing and occasionally sleep-denying, they have so far had limited systemic impact,” he said. “These episodes have been short-lived and prices have stabilised quickly.”
Salmon admitted that more research is required into the long-term effects of “fast markets.” He added: “On average, the presence of high-frequency traders has been associated with improved headline measures of liquidity”.
The most famous flash crash happened in May 2010 in New York. The Dow Jones Average sell by 9% in minutes, taking billions of dollars off the value of some huge companies. It was later blamed on a sell order by an automated trading robot.