DEFINITION of 'Flash Freeze'
A sudden shutdown in trading activity on an exchange. “Flash freeze” was first used to refer to the abrupt outage on the Nasdaq on Aug. 22, 2013, which halted trading for three hours on one of the busiest U.S. stock exchanges. A flash freeze can be triggered by a number of events – system overload, volatile algorithmic trading, faulty software and even “hacking” – although the exact cause may be difficult to identify initially. A flash freeze should not be confused with “flash crash,” which refers to the 1,000-point plunge in the Dow Jones Industrial Average that occurred within a matter of minutes on May 6, 2010.
BREAKING DOWN 'Flash Freeze'
Flash freezes may become more common in the future due to a confluence of factors including:
- increasing predominance and speed of electronic trading;
- growing complexity of trading systems;
- rising share of high-frequency and algorithmic trading, which can exacerbate market volatility and overload exchanges; and
- escalating incidence of cyber-attacks that seek to exploit vulnerabilities in large networks and systems.
The impact of a flash freeze depends significantly on (a) when it occurs and (b) the length of the shutdown. A flash freeze that occurs when market sentiment is bearish may result in an imbalance of sell orders from panicky investors when trading resumes, and a consequent plunge in stock prices. The length of the freeze also has an impact on investor reaction; while investors may take a flash freeze of a few hours in stride, one that lasts for days or weeks could severely dent investors’ confidence in the functioning of stock exchanges and the financial system.
From the investor’s point of view, the impact of a flash freeze depends on the length of his or her investment horizon. A temporary exchange shutdown – and the consequent loss of market liquidity – should make little difference to a long-term investor whose investing horizon is measured in years. However, it can be devastating to a day trader who is unable to close out positions due to an exchange outage, and is forced to liquidate these open positions at a huge loss when trading resumes.