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How to Navigate the Next Market Malfunction

This might seem silly now, but our trade support department spent hours discussing such situations on days our Web site crashed.

On May 6th, 2010, the day of the Flash Crash, someone sold Procter & Gamble (PG) for less than $40 even though shares opened for trading that day at more than $60 and closed the session at more than $60.

Companies do not lose one-third of their value over the course of 15 or 20 minutes on no news. Baskets of stocks under the hood of an ETF do not go from a net asset value of $55 to 15 cents in a matter of minutes as many ETFs did during the Flash Crash, including the Vanguard Telecommunication Services ETF (VOX).

This seems obvious in hindsight, but on that day there was plenty of confusion and plenty of panic sales, some of which were allowed to be canceled, but not orders for PG at $40.

Early on during the Flash Freeze Thursday there were reports that investors would be let out of any orders that they had entered. Not surprisingly, that announcement was replaced by a warning to investors that they would need to cancel their orders if they did not want to participate in the reopen.

Leaving an order in Thursday likely would have left investors stuck with trade executions they wouldn't have wanted.

There was no reason an investor couldn't have canceled any open orders, waited for an orderly reopen, and then placed fresh trades.

In these events, there's also the potential that you can be thrown off your game by seeing a value in your account that is a fraction of what it should be.

Again, stocks and funds do not lose one-quarter or one-third of their value suddenly on no news. People who trade in the face of these technical glitches and outages risk being stuck with the equivalent of having sold PG at $40 on the day of the Flash Crash.

These events are going to come along every now and then. It bears repeating that in the face of a market-wide malfunction, the best course of action is to recognize it for what it is and simply step away.

At the time of publication, Nusbaum had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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