By Dheeraj Veludandi. Edited by Arjun Chandrasekar.
Overview
The 2010 Flash Crash occurred on May 6, 2010 which caused many major stocks and indexes such as Dow Jones Industrial Average, S&P 500, and others to decline drastically in a span of an hour. Dow slumped about 1,000 points in just 10 minutes which caused panic to be spread within traders as well as Dow Jones index losing 9% of its value. But in the next 30 minutes, Dow recovered 600 points. One trillion dollars in equity just blew away but the market managed to regain 70% by the end of the day. The S&P 500 Volatility Index increased by about 22.5% on that day while the S&P/TSX Composite Index in Canada lost about 5% of its value in 30 minutes. This was all incredibly astonishing to the public because of the enormous fluctuation in mere minutes. Today we’ll be exploring what flash crashes are, what caused the 2010 one to happen, and the aftermath of this specific flash crash.
What is a Flash Crash?
A flash crash is an event where the value of a market declines in electronic trading in a very small period of time and then quickly recovers. The result of this is usually a quick sell-off of securities that occurs in minutes which causes huge declines. But, by the time the market closes, the prices rebound and it is almost as if the crash was never a thing. This fluctuation is where the term “flash” comes from, as if the price value changes with a snap of your fingers.
What Caused the 2010 Flash Crash to Occur?
When the 2010 Flash Crash ended, the US Securities and Exchange Commission(SEC) carried out an investigation to figure out the causes of the flash crash. The SEC published a report regarding the investigation in September 2010. In the report, it stated that a selling order of a massive amount of E-Mini S&P contracts caused the outrageous decline in the market prices. Therefore, the trading of E-Mini S&P contracts was paused so it doesn’t drop even more than it already has. The prices stabilized when the trading of the E-Mini S&P contracts resumed and the markets regained positions as prices of securities reached their initial prices. Flash crashes can happen in the future and they still do. 2 mathematics professors at the University of Michigan at Ann Arbor stated that the stock market has about 12 small flash crashes every single day.
Result of the 2010 Flash Crash
This flash crash caused many people to come to a conclusion that high-frequency traders played a major role in the crash because of selling and buying massive volumes of securities which resulted in great price volatility. In 2015, London trader Navinder Singh Sarao was arrested due to allegations of market manipulation which caused the Flash Crash. The charges showed that his trading algorithm had multiple large selling orders of E-Mini S&P 500 contracts which was the reason the Flash Crash occurred.
