THE FLASH CRASH: MACHINES GONE WILD?

1.Describe the conditions that preceded the flash crash.According to the text,
Waddell & Reed Financial started to sell $4.1 billion in future contracts using a
computer selling algorithm. Due to the algorithm being used, the program dumped
75,000 contracts onto the market over a 20 minute period. (Kenneth C. Laudon,
Management Information Systems: Managing the Digital Firm)

2.What are some of the benefits of electronic trading?Some of the benefits include
speed, cheaper price, and more liquid markets. (Kenneth C. Laudon, Management
Information Systems: Managing the Digital Firm)

3.What features of electronic trading and automated trading programs contributed

tothe crash?An algorithm is a complex program that executes exactly what it was
designed to do. In additionto the algorithm, the “stub quote” orders had already
been placed, so when the prices dropped low enough, they were immediately
bought. The lowering of prices and quick selling, caused a chain reaction that was
not being monitored, and for the time being could not be stopped until completed.
(Kenneth C. Laudon, Management Information Systems: Managing the Digital
Firm)

4.Could this crash have been prevented? Why or why not?This crash could have
been prevented if human beings were monitoring what was happening at all times.
Although computer programs are terrific and seem to make life easier, they cannot