2010 Flash Crash

At 2:32 PM ET on May 6, 2010, US equity markets experienced their most violent intraday move in history. The Dow dropped 998.5 points in 20 minutes before recovering most losses by the close. Individual stocks traded as low as $0.01 and as high as $100,000 before trades were busted. The SEC/CFTC joint investigation identified a large sell algorithm that used only volume as its execution trigger, when volatility spiked, other market-makers withdrew, and the algorithm accelerated selling into the vacuum. HFT firms that normally provided liquidity pulled back. E-mini S&P futures became the epicenter, and correlation algorithms translated the futures move into cash equities. The crash exposed three structural truths: (1) liquidity in modern markets is conditional and can disappear instantly, (2) fragmentation across exchanges amplifies cross-venue latency problems, and (3) the market-making layer that used to be provided by specialists and floor traders is now supplied by HFT firms with no obligation to stay in the market. Reforms followed, circuit breakers, LULD bands, clearly erroneous trade rules, but the underlying fragility of HFT-dominated markets remained.