A crash splash is a potential stock market event caused by computer programs that can perform millions of trades in seconds, leading to catastrophic events. The interconnectedness of different markets and the use of algorithms can also contribute to a crash. Circuit breakers are in place to mitigate damage, but the sudden drop can still cause a crisis in investor confidence.
A crash splash is a stock market event that could theoretically cause significant damage to an economy in a matter of seconds. It would be caused by the prevalence of computers and their programs that are configured to perform operations on various types of values. These computers can perform millions of trades in just a few moments, which means they can have a significant impact on the market in minimal time. While there are some safeguards to prevent the occurrence of a splash accident, many savvy investors consider it a very real concern in the modern trading world.
The use of technology in the investment world has increased to the point that almost all major investment firms use some form of computer software to make trading decisions. These computer programs can access unlimited amounts of information in a small period of time, proving to be much more efficient than humans in monitoring various markets for profitable trading opportunities. As a result, computers have been given a great deal of autonomy by their users to make business decisions, a reality that holds the potential for catastrophic events as a welcome shock.
One of the factors that contribute to so-called splash accidents is the interconnectedness of different markets. Computer trading programs monitor all the different sectors of the market, like stocks, bonds, and commodities, and how they react to each other. The programs then look for arbitrage opportunities, which is when price discrepancies give investors the opportunity to profit with virtually no risk.
Unfortunately, computers react so quickly to such opportunities that they can affect the market in seconds. Many computer programs and the complex algorithms they contain can also be tuned into real-world events that affect market supply and demand. When one of these events sends sell signals to these computer programs, the quick sell-offs can cause a crash and a precipitous fall in prices in all sectors of the market.
Many market exchanges have built-in protections known as circuit breakers to try to stop a potential splash crash. The idea behind a circuit breaker is to automatically shut down certain high-volume securities from trading if their prices fall too much in a short period of time. While these can mitigate the damage of a sudden shock, the sudden drop can still cause a crisis in investor confidence. If human investors follow the lead of the software and sell their securities in kind, the overall effect on the market can be extremely detrimental.
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