OBASHI Think

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Why the ‘flash crash’ happened – a quick take

On the 6th of May 2010 the Dow Jones share index plunged dramatically, losing over 9% of its value in the space of a few minutes.

 

Almost as quickly the index rose again, and at the end of the day the Dow was only down a small amount.

 

No proven explanation of this event has been forthcoming.

 

Here’s our take:

 

Over 90% of money exists in electronic format as data. Banks and other financial institutions are basically data refineries. They ‘pump’ this data around the globe, through people, systems and hardware, trying to make a profit on various transactions.

 

However, when compared to the refineries of the Oil & Gas world, the banks have little clarity about how everything is put together to make the business work. By extension therefore, no-one knows precisely how the financial system works.

 

As is the norm these days, last May the futures markets, the options markets and the equities markets were interacting at high speed. All it takes to cause chaos under these conditions is for a single data feed somewhere in the complex matrix to be compromised or to stop flowing for some time.

 

If that happened in an Oil & Gas refinery an automatic system would immediately stop the process and highlight the location of the interrupted flow. In a refinery Control Centre the flow of product is represented by a flow of data. This is possible because every component that supports the flow of product has a digital sensor. And the industry knows exactly how all the pieces are put together to enable the flow – ‘joining the dots’.

 

If another ‘flash crash’ is to be avoided, individual institutions and the financial system as a whole need to understand precisely how everything is put together to not only enable the flow of data, but more importantly understand the interaction between their people, processes and technology.

 

If Oil & Gas can manage it then so should the finance industry; after all the modern bank is really a data refinery.

 

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