[ by Melanie Gretchen ]

As high-frequency trading imposes its presence into the markets, there's an ominous sense that flash crashes, like the one that occurred on May 6, 2010, may follow alongside.  On that day, three years ago, at 2:45 p.m., the Dow Jones Industrial Average lost and recovered about 1,000 points within minutes.  The event cost the industry hundreds of billions as HFT computers broke down. 

Now, in 2013, CNBC's Jim Cramer said that flash crashes could become the rule, and not the exception.  And it's principally being driven by the penetration of HFT, by provide users with a millisecond edge on rival traders. 

"We used to call [it] illegal front-running, but [it] has since been accepted by the geniuses at the SEC as totally legal and even positive behavior that gives the markets more depth [and] greater liquidity." -- Mr. Cramer.

Rude Awakening. The industry was right to rule HFT illegal.  As the industry found out on May 6, 2010, Mr. Cramer realized there could be a sharp decline in the market if the high-frequency buyers vanished, and the larger firms then backed away.  Since then, the U.S. government has since instituted some trading restrictions, which may (but probably may not) work - i.e., brace yourself for the next crash.

Possible Safeguards or Antidotes to Flash Crashes.   C-I recently reported that some market centers are proposing to implement new methods for processing incoming orders that would have the effect of reducing, if not eliminating, the advantages gleaned by these lightning-fast machines.  If the programs operate as anticipated, and they are installed across most or all equity and options exchanges and market centers, it could just be the ticket for reducing the risk of flash crashes.  Stay tuned.
 

For further details, go to [CNBC, 5/6/13] and [WSJ, 5/6/13].