Have you ever thought of making a trading system that would buy tons of stock when a flash crash happens? It is going to happen again. If your system is ready and you buy before they shut the market down or roll back orders you could make a hefty profit.
The difficulty is in identifying what is a 'flash crash' (i.e. a temporary downward blip in prices caused by computer or human error) and what is a genuine downward price movement.
If the market dives and you quickly get into a big long position, and then it dives some more - what do you do? You can either close out your losing trade and take the loss, or hope that the market comes back up, all the while holding on to the risk of further losses.
Also, there's no guarantee that trades in the middle of a flash crash will remain valid after the crash. The exchange could nullify all trades in a certain period of time, which would completely wipe out your upside potential.
> The exchange could nullify all trades in a certain period of time, which would completely wipe out your upside potential.
This is the most important thing: In every single "flash crash", the exchanges have retroactively canceled trades, in a rather arbitrary manner (e.g., "every trade between 16:30 and 16:38 is null and void"). There is some underlying justification, but it is also arbitrary (e.g., "anything below 3% of the price when the flash crash started", with no specific justification for the 3% number, or a well defined methodology for the time of the crash).
That could easily turn a +$100K profit into a -$500K profit, depending on circumstance.
Nitpick: When exchanges have busted trades there is a "at or below $XX.XX" condition as well as the "between XX:XX and YY:YY" condition.
In the Flash Crash as well as the Knight Capital incident "up/down 30% from the Previous Close" was the price collar (anything outside that was busted and anything inside stood).
Of course there is no guarantee that the same criteria will be used the next time around so caveat emptor.
