5

We've seen several flash crashes in the past few years, and I suspect algorithms are some of what's behind these (see this as an example). In a short period of time, an exchange will suddenly see tons of sells and fall dramatically, only to self-correct.

Using an example of the SPY, would it be legal to put in a Good-Til-Cancelled order for $100 a share and make a profit on the flash crash, if it occurs? Note that the assumption here is that it crashes in a short period of time (within a day), not over time (so the order can be re-arranged if the market declines over a period of time).

8
  • 5
    You are basically asking if it is illegal to attempt a trade during a flash crash. What law would you imagine being broken? Commented May 6, 2015 at 15:47
  • 2
    Often times flash crash trades are cancelled, in some markets affected.
    – CQM
    Commented May 6, 2015 at 17:15
  • 1
    The market maker for those securities would suspend trading after a certain threshold is exceeded. You can put in your order, but the chances of it being executed are very slim. Commented May 6, 2015 at 17:25
  • 1
    @user541852587 you are conflating several issues. Only people profiting from spoofing are being charged with anything so far. Has nothing to do with actual flash crashes or liquidity disruptions
    – CQM
    Commented May 6, 2015 at 20:58
  • 2
    Be careful; if a stock loses most of its value over a few minutes, that might be a blip caused by a software bug, or maybe everyone just found out they'd been cooking the books for the last few years or something, and it's not coming back up. Commented May 6, 2015 at 22:14

1 Answer 1

8

A person executing a single order during a flash crash would not be high on the suspect list for the cause of the crash, so no, I wouldn't worry about it at all. There is nothing wrong with taking advantage of whipsawing prices as long as you didnt cause them.

6
  • 7
    didn't cause them and didn't know they're going to be caused, you mean
    – littleadv
    Commented May 6, 2015 at 16:10
  • @littleadv What, is it illegal not to tell the company that their algorithm was going to cause it?
    – C Bauer
    Commented May 6, 2015 at 17:21
  • 4
    @CBauer No but it is illegal to have knowledge of it before hand and act on that knowledge. Something something fraud something.
    – corsiKa
    Commented May 6, 2015 at 17:32
  • 2
    This answer does not seem to actually address the question. The OP does not seem to be concerned with being blamed for causing the crash, but rather with whether there is some prohibition about participating in the market during the event. To say there is nothing wrong with taking advantage would not be a correct statement if you violated some regulation in order to do so (such as insider trading, violating RegNMS, etc.).
    – dg99
    Commented May 6, 2015 at 21:32
  • 1
    @dg99 but again even here, the OP asked about the SPY which is an S&P500 ETF and gave an example of a flash crash in the Swiss index, these crashes are caused in the futures market which would not be subject to insider trading prohibitions. I should vote to close this question
    – CQM
    Commented May 7, 2015 at 4:38

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .