Flash Crash 2010

On 6 May 2010 the Dow Jones Industrial Average fell roughly 9% intra-day in a matter of minutes before recovering most of the loss within the same trading session. The S&P 500 e-mini futures contract experienced a similar plunge. Many individual stocks printed trades at absurd prices (some at one cent, others above $100,000) before exchanges cancelled clearly-erroneous trades. The proximate trigger, per a joint SEC-CFTC investigation, was a large futures-selling algorithm interacting with already-thin liquidity; high-frequency market makers withdrew, ETFs and individual stocks decoupled briefly from their underlying values. The event lasted minutes, but it durably changed market structure (single-stock circuit breakers, the Limit-Up-Limit-Down regime).

• Patient investors who did not panic-sell at the intra-day extreme: by close the S&P 500 had recovered most of the move.
• Long-dated Treasuries rallied modestly during the spike in fear.
• Limit orders set at sensible prices — for the brief window of dislocation, the bid side filled at far better levels than the marked price suggested.

• Stop-loss market orders, especially on individual stocks and ETFs, which triggered at the gapped-down prints and were filled far below their stop level.
• Leveraged or short-dated derivatives positions that were forcibly liquidated during the air pocket.
• Confidence in continuous liquidity — many ETFs traded at large discounts to their underlying NAV for a few minutes.

• Modern equity markets can dislocate in minutes when liquidity providers step back. The visible price is not always the executable price.
• Stop-loss orders are not insurance — they convert a paper loss into a realised loss at whatever bid happens to be available, which during a flash event can be effectively zero.
• The depth of an order book in normal conditions overstates the depth that will be there in a stress event. Liquidity is conditional, not constant.