Nasdaq Sweats Through New 'Flash Freeze.' Should You?

There will be more market glitches, weather disruptions and flash crashes. Should it matter to you?

NEW YORK, NY - AUGUST 23: The Nasdaq stock market is viewed one day after the the electronic exchange experienced a a three-hour trading delay due to a technical problem on August 23, 2013 in New York City. Both Wall Street and Nasdaq were operating normally on Friday with stocks up slightly in afternoon trading.
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Beyond the problem of computer failures, the market could face more disruptions from the uptick in storms over the past decade. Hurricane Sandy showed that Manhattan's subterranean wiring and transportation are more vulnerable than previously thought. For the record, the National Oceanic and Atmospheric Administration sees an above-normal to "very active" storm season this fall.

But because most real trading is done virtually, without any market floor, even big weather events tend to have minimal impact. The market managed to reopen after the two-day shutdown from Sandy in October 2012, and since then investors have shown confidence in Wall Street by putting more money into equity funds than they have since the 2008 crash.

[See: 10 Target Date Funds Producing High-Grade Nest Eggs.]

To be sure, the markets need to address the mysterious computer "flash" failures like the one in May 2010, Edwards says. It caused a 9 percent drop in U.S. stocks in a few quick minutes. The August "flash freeze" this year brought the $6 trillion Nasdaq market to a standstill for three hours.

But the big numbers thrown around about losses are misleading, Edwards adds. The snap calculation in news reports that the 2010 "flash crash" created a $2 trillion loss in less than 30 minutes alarmed people. But that was a theoretical value based on all of the $20 trillion worth of U.S. equities being bought at the day's high and sold at the day's low. In fact, prices sprang back quicker than people could react and soon returned to where they were before the computer glitch. Few investors felt any direct impact.

"The severe dislocations observed in many securities were fleeting," said the official report on the "flash crash" from the Securities and Exchange Commission and Commodity Futures Trading Commission. To be sure, it showed the interconnection of the markets and how vulnerable they can be to viral events. But ultimately, the market passed the flash tests, showing that "prices are adjusted back to their true level almost instantaneously when they get out of line," Kinniry says. Volatility measures have continued to decline over the past two years, showing that the disruptions are being taken more in stride.

"The best advice for long-term investors is to not react to these kind of things," Kinniry says. "Typically they resolve themselves. I hate to promise anything, but that's been the history."

Updated on 09/05/2013: This story was originally published on September 4, 2013.