Posted in Finance, Accounting and Economics Terms, Total Reads: 345
Definition: Flash Freeze
Flash Freeze means a sudden shutdown in the trading activity on a stock exchange. This term was used for the first time on 22nd August, 2013 in reference of the sudden outage on the NASDAQ. It stopped the trading for almost 3 hours on a busiest stock exchange in the US. It can be triggered by many events which include the use of faulty software, volatile algorithmic trading, system overload or even hacking can cause flash freeze. It is difficult to find out the exact cause of the flash freeze. A flash freeze is a different concept from the flash crash which refers to a drop of 1,000 points within a few minutes in Dow Jones Industrial Average. It occurred on the 6th May, 2010.
There are high chances of flash freezes occurring frequently in the near future because of many factors including of increasing complexity in the trading systems, escalating the incidence of the cyber-attacks which seek to exploit the vulnerabilities in the large networks & the systems, rising share of the high frequency & algorithmic trading that can exacerbate the market volatility and may overload the exchanges and most importantly, increasing dominance and speed of the electronic trading.
The impact of any flash freeze depends on two factors - when it occurs & the time of the market shutdown. If the market is bearish at that time, it may result in an imbalance of the sell orders from panicked investors after trading resumes resulting in a plunge in the stock prices. The time length of the freeze also has an effect on an investor’s reaction. A flash freeze of a few hours may be ok but one which lasts for few days or weeks may dent the confidence of investors in the functioning of the stock exchanges and the financial system.
From an investor’s view, the length of his investment horizon decides the impact of a flash freeze for him. A temporary shutdown in exchange & the consequent loss of the market liquidity should make a little difference for a long term investor who is measuring his investment horizon in years. But for a day trader, it may be devastating because he is not able to close out the position because of the exchange breakdown & he is forced to liquidate them at a huge loss after trading resumes.