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).

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    You are basically asking if it is illegal to attempt a trade during a flash crash. What law would you imagine being broken? – EkoostikMartin May 6 '15 at 15:47
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    Often times flash crash trades are cancelled, in some markets affected. – CQM May 6 '15 at 17:15
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    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. – Mr. Mascaro May 6 '15 at 17:25
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    @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 May 6 '15 at 20:58
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    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. – user3757614 May 6 '15 at 22:14
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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.

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    didn't cause them and didn't know they're going to be caused, you mean – littleadv May 6 '15 at 16:10
  • @littleadv What, is it illegal not to tell the company that their algorithm was going to cause it? – C Bauer May 6 '15 at 17:21
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    @CBauer No but it is illegal to have knowledge of it before hand and act on that knowledge. Something something fraud something. – corsiKa May 6 '15 at 17:32
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    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 May 6 '15 at 21:32
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    @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 May 7 '15 at 4:38

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