Analysis of the Flash Crash Event via IT Management Principles

This case study examines the 2010 Flash Crash in the US stock market through the lens of information technology management. It identifies organizational and structural weaknesses in the electronic trading system as a primary cause, highlighting the roles of management, organization, and technology. The case emphasizes Navinder Sarao's manipulative trading strategies, specifically spoofing and layering, as key factors contributing to the crash. The study suggests implementing systems to slow trading during high volatility and tightening risk controls as effective solutions. The analysis also points out that earlier intervention and a more comprehensive review of trading data could have prevented or mitigated the crash. Desklib offers similar solved assignments and resources for students.

Running head: INFORMATION TECHNOLOGY MANAGEMENT
Information Technology Management
Name of the Student
Name of the University
Author’s Note:

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INFORMATION TECHNOLOGY MANAGEMENT
Question 1
Identification of Problem and Control Weaknesses
On 6th May, 2010, the US stock markets eventually suffered a market crash of trillion
dollar and it lasted for 26 minutes. Dow Jones Industrial Average that is responsible for
representing 30 largest companies in America, plummeted over 600 points in less than 5
minutes. The shares of few significant companies like Accenture and Procter and Gamble
traded down either as lower as one single penny as higher as 100000 dollars. As soon as the
market was stable, it was able to gain all the points. For this flash crash event, few companies
were in massive losses and all others were in major profits. The experts attribute this crash to
the organizational as well as structural features of the electronic trading system, which
executes the majority of trades over Dow. The weakness of this type of huge market can be
controlled with systems to slower trading in stocks when they become extremely volatile as
they have the major potentials to control the risk.

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INFORMATION TECHNOLOGY MANAGEMENT
Question 2
Management, Organization and Technology Factors contributed to Problem with
Justifications
The case study of flash crash comprised of three types of factors, which are
management, organization and technology. This is mainly because of the reason that several
steps of these three factors could be easily analysed here. Since, flash crash is related to
financial sectors and operating resources, it is extremely important to manage them and
maintain an effective management within the business. This type of management is
responsible for ensuring better market stability and bringing new opportunities to the stock
market. The organizational factors are involved here since lack of better management has led
to such issues within the stock market. The technological factors play the most important
roles in this case study. Navinder Sarao was able to breach the market with help of help of
illegal trading strategies by spoofing or layering technique. He was able to manipulate the
market by tinkering the commercially available software.

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INFORMATION TECHNOLOGY MANAGEMENT
Question 3
Explanation of Sarao being Responsible
Navinder Sarao was responsible for the flash crash that occurred in US stock market
in 2010. He profited from flash crash case by confidently manipulating the stock markets by
using few significant strategies for illegal trading between 2009 and year of 2014. Sarao was
eventually accused for placing and withdrawing several orders that valued between millions
of US dollars each on all the days of trading for the core purpose of pushing down the cost of
the future contracts that were tied to the 500 stock index value of Standard and Poor. As soon
as the prince fell, he would eventually buy that contract and then enjoy profits. On flash crash
day, he repeatedly placed larger orders that represented around 170 million dollars to about
200 million dollars and then cancelled them just when they were about to be executed. Thus
the market became extremely vulnerable to the big moves as soon as other investors made
trade on that day. It is termed as layering or spoofing.

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INFORMATION TECHNOLOGY MANAGEMENT
Question 4
Effective Solution for the Problem
The issue of flash crash could have been resolved if the US market leaders would
have been more attentive. Before the day, Sarao was questioned about his activities, however
no legal steps were being undertaken against him. This made the situation even worse.
Moreover, there was a constant imbalance of orders. The investigators ignored the indication
that were available after flash crash and it would have easily led to Navinder Sarao easily.
They had complete data set, however they only focused on the actual trade data. If all the
offers and bids were included, they could have easily tracked Sarao’s activities. The effective
solution to this problem is to implement a system for slowing the trading within stocks when
they become extremely volatile and for tightening the risk controls. Another flash crash could
be prevented by properly checking the market volatility and when trading should be made
slower. Moreover, implementation of the above mentioned system would also be an effective
solution.

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INFORMATION TECHNOLOGY MANAGEMENT
Bibliography
Holtshouse, D. K. (2013). Information technology for knowledge management. Springer
Science & Business Media.
Marchewka, J. T. (2014). Information technology project management. John Wiley & Sons.
Schwalbe, K. (2015). Information technology project management. Cengage Learning.
Willcocks, L. (2013). Information management: the evaluation of information systems
investments. Springer.