A Better Theory on the Flash Crash?

In the original telling of the Flash Crash, which many astute critics viewed as poorly documented fiction, an unidentified mutual fund company (later named in press reports as Waddell & Reed) was blamed for setting things off with a massive sell order of Standard & Poor’s 500 E-mini futures. Now along comes the 36-year-old Londoner and high-frequency trader Navinder Singh Sarao. The CFTC and the Justice Department claim Sarao made $40 million from 2009 to this year by programing his trading robots to illegally manipulate the E-mini market. (Barrons)

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What caused Black Monday, the stock market crash of 1987?

The cause of the stock market crash of 1987 was primarily program trading, used by institutions to protect themselves from significant market weakness. Some secondary factors included excessive valuations, illiquid markets and market psychology. Program trading exacerbated market weakness even though it was designed as a hedge. These computer programs automatically began to liquidate stocks as certain loss targets were hit, pushing prices lower. Then, the lower prices fueled more liquidation with stocks dropping 22% on the day. This is an example of behavior that is rational on an individual level – but irrational if everyone adopts the same behavior.

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