2.What people, organization, and technology factors contributed to this problem?
ID: 3854666 • Letter: 2
Question
2.What people, organization, and technology factors contributed to this problem? To what extent was it a technology problem? To what extent was it a people and organizational problem? 3.To what extent was Sarao responsible? Explain your answer. 4.Is there an effective solution to this problem? Can another flash crash be prevented? Explain your answer. INTERACTIVE SESSION: PEOPLE The Flash Crash: A New Culprit At 2:42 PM. on May 6, 2010, U.S. stock markets millions of dollars each on hundreds of trading suffered a trillion-dollar stock market crash last- days to push down the price of futures contracts ing 26 minutes. During that brief period, the Dow tied to the value of the Standard & Poor's 500 Jones Industrial Average, which represents 30 of stock index. (A futures contract is an agreement the largest American companies, plummeted more to buy or sell a particular commodity or financial than 600 points in less than five minutes. Shares instrument at a predetermined price in the future.) of some prominent companies such as Procter & When the price fell, Sarao would buy the contract and realize profits. Gamble and Accenture traded down as low as a penny or as high as S100,000. By 3:07 PM., the market had regained nearly all the points it had lost that afternoon. Nevertheless, some were left with huge losses and others with enormous profits from this flash crash, and the confidence of the American public in the stock market was severely shaken. On the day of the flash crash, Sarao repeatedly placed large orders representing $170 million to more than $200 million and then canceled them just before they were executed, making the market even more vulnerable to big moves when several other investors made a big trade that day. The fall- ing price of the futures contracts that Sarao was trading spread to related markets, triggering a cas- cade of trades and contributing to the Dow Jones How could this have happened? Several finan- cial companies, such as Universa Investments and Waddell & Reed, had placed very large trades industrial average 600-point free fall. ting that the S&P; 500 index would drop. After This technique is called spoofing or layering these trades, the market began spiraling down and it is illegal. A trader enters large orders to ward as other investors rapidly followed suit, sell- buy or sell a contract to trick other traders into or making bets of their own to reduce their thinking the price is rising or falling. That trader risk. The market was overwhelmed by sell orders then quickly cancels the original order and places h no legitimate buyers to meet those orders. other orders that take advantage of the price Experts initially attributed the crash to struc movements. The illegal strategy can be executed tural and organizational features of the electronic in fractions of a second, which makes surveillance trading systems that execute the majority of trades on the Dow and the rest of the world's major sock exchanges. The huge wave of flash crash sell orders intensified because of high-speed comput manipulations, including $879.000 on the day difficult. Authorities said Sarao had pocketed S40 mil- lion in profits from 2010 to 2014 through such erized trading programs. High frequency traders the flash crash. They allege that Sarao tinkered HFTs) have taken over many of the responsi with commercially available software to create an ilities once filled by stock exchange specialists automated trading algorithm that allowed him to and market makers whose job was to provide place and cancel orders instantaneously. Sarao he majority of stock market liquidity. But many claims that he is an "old school point-and-click dectronic systems, such as those HFTs use, are trader with unusually good reflexes and intu- automated, using algorithms to place their nearly ition and that he had cancelled large volumes nstant trades. In situations like the flash crash, of orders manually without the help of an auto- ahen an algorithm is insufficient to handle the mated trading program. He also noted that he had complexity of the event in progress, electronic complained more than 100 times to the Chicago trading systems have the potential to make a bad Mercantile Exchange, where he had traded futures contracts, about the manipulative trading prac uation much worse Five years later, another explanation emerged. A single trader who operated out of his West tices of other HFTs. Long before the flash crash, the exchange had London home was largely responsible for the questioned Sarao about his trading activity, but the nent Oa April 21, 2015, the United States Justice exchange did not take any action against him, and Department had British authorities arrest 36-year- Sarao continued his trading activities until April ld Navinder Sarao, charging him with profiting 2015. Finally, a whistleblower brought new informa- rom the flash crash by boldly manipulating mar tion to the Commodity Futures Trading Commission ies and using illegal trading strategies between (CFTCL, which oversees the futures markets. This 9 and 2014. Sarao was accused of having placed whistleblower, who declined to be identified, had nd withdrawn thousands of orders worth tens of spent hundreds of hours analyzing data. A new team 1 of 2Explanation / Answer
1:dentify the problems and the control weaknesses described in this case.
Ans:1.The main reason for flash crash is high speed computerized trading programs.HFT ,High Frequency Traders, once filled by the stock exchange specialists and market makers whose job is to provide the majority of stock market liquidity. But the HFT not working properly on Flash crash situation, it is failed show nearly instant trades using algorithms.
2.Spoofing,Using this technique a trader enters a large orders to buy or sell a contract to trick other trades in to thinking the price rising or failing. Using this technique the sarao was placed large orders 170 million dollars to 200 million dollars and cancelled before they executed.
3.The another important weakness is old-school-point-and-click trader, using this the trade have commercially available s/w to create an automated trading algorithm for placing and cancelling orders.
2.What people, organization, and technology factors contributed to this problem? To what extent was it a technology problem? To what extent was it a people and organizational problem?
Ans.
There are many companies suffered for the flash crash problem some of are
1.Procter & Gamble Accentuare
2.Universa investments
3.Waddell&Reed
This is technology problem, the HFT failed show nearly instant trades in that situation SPOOFING has disadvantage, some times it leads to huge market falling down.
This is also happen for the sarao,the man who is using pocketed money $879,00 using the spoofing technique.
This is also happen for inverstors,on flash crash situation they are focused only he data related to actual trades instead all bids.
3.To what extent was Sarao responsible? Explain your answer.
Ans.Sarao is the main responsible person for the flash crash, earned 40 million dollars during 2010 to 2014 years using spoofing Technique(a trader enters a large orders to buy or sell a contract to trick other trades in to thinking the price rising or failing).He also using the drawbacks of trading systems such as old-school-point-and-click trader.
4.Is there an effective solution to this problem? Can another flash crash be prevented? Explain your answer.
Ans.At first the investors, organizations and traders all people take a look market carefully before they invest the money and also think before cancel the order.
The finical industry also take care about the draw backs such as old-school-point-and-click and also implement new high speed computerized trading programs to find near instant traders in all situations.
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