On May 6 the broader market averages were headed for a sizeable decline, but the selling was orderly. What happened over the space of about 15 minutes, beginning at around 2:40 pm, was extraordinary: The Dow Jones Industrials Average plunged from about 350 points down to almost 1,000, and the S&P 500 sliced through a key support at 1,100, hitting a low of 1,065. Soon thereafter, the market recovered, rallying back to roughly where it was before the precipitous drop.

More than a month behind us, the Flash Crash has been dissected thoroughly by pundits, media and investors alike, but so far no one can point to a definitive cause.

Naked exchange access provided by brokerages to high-frequency traders had shouldered much of the blame over the past month, but many now point the finger at Waddell & Reed Financial (NYSE: WDR). Although Waddell & Reed is a relatively small firm, its management has admitted that the company was one of the biggest sellers of the e-mini contracts—S&P 500 futures contracts traded on the Chicago Mercantile Exchange—that played a leading role in the sudden nosedive.

On that infamous day Waddell sold around 75,000 contracts—about 9 percent of total volume that day—during the 20-minute period when the markets were in free fall. These trades were part of a hedging strategy the firm uses in some of its mutual funds.

Many traders and algorithms use the e-mini markets to gauge investor sentiment. When the e-mini market flashes bearish signals, it can trigger selling in the broader equity markets.

This action and response might have started the chain reaction, but the behavior of the exchanges themselves exacerbated the situation.

Back in 2005 the Securities and Exchange Commission (SEC) instituted Regulation NMS, a change that included a trade-through rule meant to encourage the implementation of faster electronic platforms. The regulator believed that electronic platforms, coupled with a requirement that systems scour all exchanges for the best available price, would ensure better order execution for traders and investors.

Although quantitative data from the exchanges shows that Regulation NMS achieved that goal, the system drained the market of liquidity.

Individual exchanges initiated “selfhelp” rules designed to slow the pace of trading by getting human specialists involved in order matching as volatility rises.

But these self-help rules aren’t uniform and, in this case, only dried up liquidity even more quickly as the several exchanges implemented the rules at various points throughout the crash.

Thus far the SEC has responded by implementing a rule that dictates how and when exchanges can declare self-help and slow the pace of trading market- wide. As of June 11, all exchanges will institute a five-minute, cross-market timeout for any stock whose price changed 10 percent in the preceding five minutes.

This measure should prevent situations in which automatic order routing sends bids to less favorable exchanges and give traders and specialists in pause in which to determine if a real shift in value has occurred or if the stock is simply experiencing a hiccup.

The single security timeout rule will be in place for the next six months, at which time the SEC will evaluate its effectiveness and determine whether to expand the program beyond the S&P 500 components it currently covers. It’s widely expected that the SEC will also propose market wide timeouts based on index levels. But it will take some time for the rules to be fully implemented; investors are still exposed to the possibility that another flash crash could occur without warning. A small change in your risk-management strategy can help insulate your portfolio against that risk.

When Tools Break

Stop-loss orders are popular among individual investors. Most set stop-loss orders at a specific price or percentage loss. But there’s no guarantee that the orders will be executed at a fixed price; once triggered, these sell orders are executed at the next best available price. As we saw during the Flash Crash, this price can be multiples below the predetermined trigger point.

Rather than placing a straight stop-loss order that converts to a market order, you can set a stop-loss limit order that directs your broker to sell only at a specified price or better. Investors using limit orders rather than market orders wouldn’t have suffered the massive losses inflicted upon some investors.

The downside to limit orders is that there’s no guarantee that they would be executed, particularly in a fast moving market where thresholds can be quickly crossed. They also tend to carry slightly higher commission fees than market orders.

But using a limit order provides some protection against being stopped out of quality business at extremely unfavorable prices.