'Flash crash' worries go global

While the While the "flash crash" caused the Dow to fall nearly 1,000 points that day, it didn't make a big dent in investor confidence. Click the chart for more market data. By Ken Sweet, contributing writer


NEW YORK (CNNMoney) -- On the one-year anniversary of the infamous 'flash crash' that sent the Dow industrials plunging nearly 1,000 points in less than 20 minutes, questions remain about how prepared markets around the world are to stop a similar event.

"The SEC has done a good job to create an infrastructure, but in other markets creating this type of infrastructure is not as easy," said Larry Tabb, CEO of the Tabb Group, which tracks the exchange industry.

In the aftermath of the May 6 flash crash, the Securities and Exchange Commission established new rules -- including expanding the use of "circuit breakers" to include exchange traded funds and stocks. Circuit breakers halt trading when a stock or an index falls by a certain percentage in a short period of time.

As U.S. regulations were being shored up, volatility and volume on U.S. exchanges was drying up. And that was forcing high frequency traders to seek out other markets, largely in emerging economies. But that shift could be leaving those exchanges vulnerable to a 'flash crash' scenario.

In the May 6 flash crash, all it took was one trader who accidentally tried to sell a massive amount of a security tied to the S&P 500 index. That led to a cascading amount of sell orders throughout the market.

High-frequency trading remains a high-growth source of revenue for stock markets in developing economies, and stock exchanges in countries such as Brazil, Russia and South Africa are increasingly marketing themselves as venues for that type of trading. Russia unveiled a new trading platform in February, while Brazil cut its fees for high-frequency trading late last year.

And the Osaka Stock Exchange launched its own high-frequency and algorithmic trading platform in February.

"The global trend is toward increasing algorithmic trading at all exchanges worldwide," said Roman Goryunov, CEO at Russia's RTS Stock Exchange.

Global stock exchange volumes are up 10% so far this year compared to a year ago, according to the World Federation of Exchanges. And nearly all that growth came from outside the United States.

Goryunov said 60% of his exchange's volume now comes from high-frequency trading, and he expects that to rise.

"Even though the Russian market is at the very early stage of [developing high-frequency trading technology], the growth potential is huge," Goryunov said.

BM&F Bovespa, the parent company for Brazil's stock, commodities and futures exchanges, posted a 10% increase in overall revenue last year -- helped by a 70% surge in daily trading volume.

But how prepared are these exchanges to handle all that extra volume?

Goryunov said his exchange in Russia has developed preliminary barriers, such as order limits to stop the possibility of a flash crash-like event, and is working to put in additional regulations.

Interestingly, Brazil has actually lowered trading fees in an effort to increase high-frequency trading volume. While the exchange has also put in some order limit regulations, lower fees heighten the possibility of a flash crash occurring.

Experts say exchanges should be working together.

"There really needs to be cross-region regulation among the world's exchanges, but that hasn't happened," said Matthew Samelson, CEO of Woodbine Associates, a capital markets research firm.

Tabb doesn't think the growth of high-frequency trading in emerging markets would directly lead to a flash crash. However, there is some concern about U.S. or Europe-based ETFs that directly invest in these markets, because many of them are dependant on high-frequency trading systems.

"If for some reason there's sudden movement in one of these ETFs, it could cause that country's local cash equities market to go," Tabb said. But it wouldn't have much impact on U.S. investors, experts say.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.01%4.03%
15 yr fixed3.12%2.97%
5/1 ARM3.11%2.99%
30 yr refi4.04%4.09%
15 yr refi3.15%3.05%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,804.80 26.65 0.15%
Nasdaq 4,765.38 16.98 0.36%
S&P 500 2,070.65 9.42 0.46%
Treasuries 2.18 -0.03 -1.27%
Data as of 9:44pm ET
Company Price Change % Change
Bank of America Corp... 17.62 0.09 0.51%
Apple Inc 111.78 -0.87 -0.77%
General Electric Co 25.62 0.48 1.91%
Intel Corp 36.37 -0.65 -1.76%
Microsoft Corp 47.66 0.14 0.29%
Data as of Dec 19

Sections

New York Magazine reporter Jessica Pressler, who has been caught up in controversy this past week, will not be moving on to a new job at Bloomberg News. More

Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More

Forums in dark corners of the web sell the kinds of hacks that befell Sony. More

Unilever sued Hampton Creek over its egg-free mayonnaise spread Just Mayo. But the company behind Best Foods and Hellman's mayonnaise has now dropped the lawsuit. More

The income of the top 1% jumped significantly in 2012, far outpacing inflation. Not only did this group make a larger share of the country's income, their share of total taxes also jumped from 35% to 38%. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.