What happened when the stock market lost a trillion dollars in minutes, and got most of it back?
On 6 May 2010 shares of well-known companies traded for a penny and for $100,000 within minutes, as computers pulled out of the market.
▶ Start the storyOn 6 May 2010, at 2:32 in the afternoon, a large investor began selling a very large number of futures contracts. Over about 36 minutes the Dow plunged 998.5 points, about 9%, most of it within minutes, and then recovered a large part of the loss. It was a trillion-dollar flash crash.
36 min
What made it a flash is that much of the trading was done by computers. High-frequency trading, or HFT, is automated trading with very high speeds and turnover, in which computers move in and out of positions in seconds or fractions of a second. High-frequency traders aim to capture sometimes a fraction of a cent on every trade, and they do not hold portfolios overnight. Many describe their business as market making: posting prices to buy and to sell and earning the bid-ask spread.
That day the large seller's orders were taken by high-frequency firms, which within minutes tried to resell what they had bought, passing contracts back and forth like a hot potato. Then the computers of most high-frequency firms decided to pause trading, and those firms scaled back or withdrew. With the liquidity gone, shares of well-known companies such as Procter & Gamble and Accenture traded as low as a penny or as high as $100,000, because orders were executing against placeholder prices that nobody expected to be reached.
Trading in the futures was paused for five seconds, prices stabilized, and by 3:00 p.m. most stocks had returned to prices reflecting true consensus values.
Who was to blame is disputed. The joint SEC and CFTC report said high-frequency traders accelerated the large seller's effect by selling aggressively; the CME, the futures exchange, found no evidence that they played a role. A 2014 CFTC report concluded that they did not cause the crash but contributed to it by demanding immediacy ahead of others. The industry says HFT improves liquidity and lowers costs; one academic study left open whether it helps in turbulent markets, since algorithmic liquidity suppliers may simply turn off their machines when markets spike downward.
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Recap
Liquidity from firms with no duty to stay can be there until the moment it is needed.
💡 A trick to remember it · Fast hands are friends in calm weather, but no one holds them to the tide.
Surprising fact · Some shares traded at a penny and others at $100,000 during the flash crash.
Sources (2)
No source, no claim. Every fact in this lesson (30 claims) cites at least one of these.