How One Trade Could Change the World: High Frequency Trading and the Flash Crash of 2010

Financial markets are controlled directly by a small population of people, but have direct effects on almost every aspect of the global community. Financial markets are now flooded with computerized algorithms that have drastically changed the face of trading. As with any advances in technology, there are always unforeseen events that create new challenges, and adjustments that need to be made. In our increasingly global and technological world, one wrong click of the mouse in New York could affect the stock markets in London, Tokyo, and Brazil. On May 6th, 2010, such a situation occurred and caused the Dow Jones Industrial Average to drop 9.8 percent in a matter of minutes. The “Flash Crash”,as it has become known,is a perfect example of how removing the human element from trading can cause problems that ripple through the economy. This event brought to light the major impact that High Frequency Trading (HFT) has on financial markets, when such a large majority of trades occur without even a human click of the mouse. The value of the Dow Jones Industrial Average multiplied by over 47 times and the volume grew about 2975 times from 1928 to 2011. Therefore, the spike in volume and stock price in recent years is definitely a correlation to note due to the introduction of technology. A widely cited statistic by the TABB Group is that high frequency trading accounts for 65% of volume on the United States market (Russolillo, 2011). The study that is conducted in this research will examine statistical hypothesis tests of the data from May 6th, as well as five other days to demonstrate the negative effects that high frequency trading can have on the financial markets