Foundations of Information Systems
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This article discusses the case study of the flash crash of the US stock market in 2010 and its prevention. It explores the management, organization, and technology factors involved and provides insights into the extent of responsibility of Navinder Sarao. Effective solutions for prevention are also discussed.
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Running head: FOUNDATIONS OF INFORMATION SYSTEMS
Foundations of Information Systems
Name of the Student
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Author’s Note:
Foundations of Information Systems
Name of the Student
Name of the University
Author’s Note:
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1
FOUNDATIONS OF INFORMATION SYSTEMS
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................3
Question 3..................................................................................................................................5
Question 4..................................................................................................................................6
FOUNDATIONS OF INFORMATION SYSTEMS
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................3
Question 3..................................................................................................................................5
Question 4..................................................................................................................................6
2
FOUNDATIONS OF INFORMATION SYSTEMS
Question 1
Identification of Problem and Controlling of Weaknesses
On 6th May 2010 at 2.42 pm, the US stock market eventually suffered a major crash of
trillion dollar in their stock market for lasting about 26 minutes. The Dow Jones industrial
average majorly represents 30 of the biggest organizations of America and plummeted over
600 points in lesser than five minutes. The respective shares of the popular companies like
Procter and Gamble as well as Accenture traded down to the lowest of a penny and highest as
100,000 dollars. Within 3.07pm, the market was stable; however, during the crash, few had
gained major profit and few were with losses. The major wave of the flash crash selling
orders intensified for the higher speed systematic trading programs. In April 2015, US
government arrested Navinder Sarao, since he was charged by profiting from flash crash after
manipulation of markets and utilization of illegal trading strategy. For controlling the
weaknesses in this case study, the US government implemented several reforms, with a
specific system for slowing the trades as soon as the stocks became too volatile and hence
risks were being controlled.
FOUNDATIONS OF INFORMATION SYSTEMS
Question 1
Identification of Problem and Controlling of Weaknesses
On 6th May 2010 at 2.42 pm, the US stock market eventually suffered a major crash of
trillion dollar in their stock market for lasting about 26 minutes. The Dow Jones industrial
average majorly represents 30 of the biggest organizations of America and plummeted over
600 points in lesser than five minutes. The respective shares of the popular companies like
Procter and Gamble as well as Accenture traded down to the lowest of a penny and highest as
100,000 dollars. Within 3.07pm, the market was stable; however, during the crash, few had
gained major profit and few were with losses. The major wave of the flash crash selling
orders intensified for the higher speed systematic trading programs. In April 2015, US
government arrested Navinder Sarao, since he was charged by profiting from flash crash after
manipulation of markets and utilization of illegal trading strategy. For controlling the
weaknesses in this case study, the US government implemented several reforms, with a
specific system for slowing the trades as soon as the stocks became too volatile and hence
risks were being controlled.
3
FOUNDATIONS OF INFORMATION SYSTEMS
Question 2
Contribution of Management, Organization and Technology Factors
Management, organization and technology factors contributed majorly to this
particular flash crash of the United States government. The major factors that affected this
particular case study are as follows:
i) Communication: There was lack of transparency for communication amongst the
traders and the stock market and hence this created a major issue for the engagement of
resources.
ii) Proper Recognition: A distinct and proper recognition is the next factor for
management for the creation of motivational notion towards the exceeding targets.
The organizational factors that majorly affected the flash crash of the stock market of
the United States in 2010 are as follows:
i) Lack of Strategies: The US stock market did not take up significant strategies for
resolving these kinds of situations and hence when the stock market crashed, they were
unable to survive through it quickly.
ii) Environment: Since, the stock market was on top position, this US government
should have checked the stock market environment properly so that they would have been
able to deal with the issues more efficiently.
The technological factors that have majorly affected the situation of flash crash are as
follows:
i) High Speed Computerized Programs: The huge wave of flash crash selling orders
eventually intensified for the higher speed of several computerized programs.
FOUNDATIONS OF INFORMATION SYSTEMS
Question 2
Contribution of Management, Organization and Technology Factors
Management, organization and technology factors contributed majorly to this
particular flash crash of the United States government. The major factors that affected this
particular case study are as follows:
i) Communication: There was lack of transparency for communication amongst the
traders and the stock market and hence this created a major issue for the engagement of
resources.
ii) Proper Recognition: A distinct and proper recognition is the next factor for
management for the creation of motivational notion towards the exceeding targets.
The organizational factors that majorly affected the flash crash of the stock market of
the United States in 2010 are as follows:
i) Lack of Strategies: The US stock market did not take up significant strategies for
resolving these kinds of situations and hence when the stock market crashed, they were
unable to survive through it quickly.
ii) Environment: Since, the stock market was on top position, this US government
should have checked the stock market environment properly so that they would have been
able to deal with the issues more efficiently.
The technological factors that have majorly affected the situation of flash crash are as
follows:
i) High Speed Computerized Programs: The huge wave of flash crash selling orders
eventually intensified for the higher speed of several computerized programs.
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4
FOUNDATIONS OF INFORMATION SYSTEMS
ii) Automatic Electronic Systems: The next technological factor is the automatic
electronic system that was driven by algorithms for placing the nearly instant trade. During
the flash crash, this algorithm was not enough for handling the complexities of events in
progress and hence situation was worse.
FOUNDATIONS OF INFORMATION SYSTEMS
ii) Automatic Electronic Systems: The next technological factor is the automatic
electronic system that was driven by algorithms for placing the nearly instant trade. During
the flash crash, this algorithm was not enough for handling the complexities of events in
progress and hence situation was worse.
5
FOUNDATIONS OF INFORMATION SYSTEMS
Question 3
Extent of Responsibility of Sarao
In April, 2015, The United States Justice Department arrested Navinder Sarao with
charges of profiting from flash crash of stock market by manipulation of the market and also
utilizing illegitimate trading strategies within the years of 2009 or 2014. He was also accused
to have placed as well as withdrawn numerous orders of worth ten million dollars each on the
hundreds of trading days for the purpose of pushing down of the cost of future contract that is
tied to 500 stock index value of Standard and Poor. As soon as the price of the stocks used to
fall down, he would buy that contract and hence enjoy profits. Sarao placed repeated larger
orders on that particular day for the representation of 170 million dollars until over 200
million dollars. After that, he cancelled the stocks and thus the market became more
vulnerable for bigger moves. He was strongly responsible for spoofing or layering and thus
was termed as illegal. As per estimation, Sarao had got more than 40 million dollars as profit
during the flash crash.
FOUNDATIONS OF INFORMATION SYSTEMS
Question 3
Extent of Responsibility of Sarao
In April, 2015, The United States Justice Department arrested Navinder Sarao with
charges of profiting from flash crash of stock market by manipulation of the market and also
utilizing illegitimate trading strategies within the years of 2009 or 2014. He was also accused
to have placed as well as withdrawn numerous orders of worth ten million dollars each on the
hundreds of trading days for the purpose of pushing down of the cost of future contract that is
tied to 500 stock index value of Standard and Poor. As soon as the price of the stocks used to
fall down, he would buy that contract and hence enjoy profits. Sarao placed repeated larger
orders on that particular day for the representation of 170 million dollars until over 200
million dollars. After that, he cancelled the stocks and thus the market became more
vulnerable for bigger moves. He was strongly responsible for spoofing or layering and thus
was termed as illegal. As per estimation, Sarao had got more than 40 million dollars as profit
during the flash crash.
6
FOUNDATIONS OF INFORMATION SYSTEMS
Question 4
Effective Solution for Prevention of the Flash Crash
For the proper prevention of the flash crash that occurred in the United States stock
market, after the incident, numerous reforms were being deployed by this government. A new
system is eventually implemented for the core purpose of slowing the process of trading
within the stocks, only when they are becoming excess volatile. Moreover, a requirement was
also required for each and every trading firm to send their orders to the market for tightening
the risk controls. Other solution to prevent the flash crash is that the financial industry is
subsequently working on the CAT or consolidated audit trails. CAT enables the regulators in
monitoring the stock as well as option orders within real time and then quickly pinpoint the
manipulators.
FOUNDATIONS OF INFORMATION SYSTEMS
Question 4
Effective Solution for Prevention of the Flash Crash
For the proper prevention of the flash crash that occurred in the United States stock
market, after the incident, numerous reforms were being deployed by this government. A new
system is eventually implemented for the core purpose of slowing the process of trading
within the stocks, only when they are becoming excess volatile. Moreover, a requirement was
also required for each and every trading firm to send their orders to the market for tightening
the risk controls. Other solution to prevent the flash crash is that the financial industry is
subsequently working on the CAT or consolidated audit trails. CAT enables the regulators in
monitoring the stock as well as option orders within real time and then quickly pinpoint the
manipulators.
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