November 09, 2010

While the SEC hashes out the causes of the May 6 Flash Crash, the New York Times takes a close look at a mini flash crash that occurred in the early afternoon of September 27 of this year. This mini flash crash shares many of the same characteristics of the May 6 slide, but without the same repercussions to the market.

The Details: Progress Energy, a 102 year-old utility based in North Carolina, saw its stock price plummet from $44.57 a share down to $4.57 in a matter of seconds. Within five minutes of the free fall, the circuit breakers were activated and the stock stopped selling for five minutes.

Here are some highlights from The NY Times report:

Warning Signs? Robert F. Drennan Jr., the vice president for investor relations at Progress Energy, reviewed the trading records and said he had noticed unusual trading activity leading up to the plunge. While it's a fairly sleepy stock that "may go for several seconds without a trade," the activity increased before the price took a dive. "There was a big ramp-up in the trades, hundreds of trades a second," he said.

A rolling stop: "…the circuit breaker worked on the New York Exchange, but trading happens so fast that before other exchanges could also halt trading, the company's stock price continued to fall on the Nasdaq, all the way down to $4.57."

The panic: Progress Energy received calls from worried investors, including hedge funds: "When the hedge funds call up and start to complain, you know you have a problem," said one Progress Energy official.

More to come? "It's like seeing cracks in a dam," said James J. Angel, professor at the McDonough School of Business at Georgetown University. "One day, I don't know when, there will be another earthquake."

Food for thought.

ABOUT THE AUTHOR
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...