Friday marked the first anniversary of the infamous Flash Crash, when the Dow dropped 900 points in a matter of minutes, before making a seemingly miraculous recovery. I was watching it "live" as it happened and knew it was a market malfunction, not a market correction.
Since then, the Flash Crash has been studied and studied. The most common belief is that there was an innocent "fat-finger" input error by a brokerage firm. That may be and is certain to happen again. So, new rules on shorting became effective in February. In June, new rules become effective on "limit up, limit down" which means the price cannot be more than 10% different from the average price over the last five minutes. Both of these steps do help but are only modest first steps.
I think the real culprit is "high-frequency" trading, where mindless computers keep generating buy or sell orders, that literally trade in nano-seconds, based solely on price and volume action on various exchanges.
So, can it happen again? Absolutely, but remember no retail investor actually lost any money during the Flash Crash! The orders were voided. It just further reduces investor confidence, which is not helpful.
I don't worry about another Flash Crash. That is just messy and embarrassing. I do worry about a derivatives crash . . . a lot!
