Economics●●●●●Difficulty 5 of 5

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 story

On 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

Duration of the 6 May 2010 flash crash, in which the Dow fell 998.5 points (about 9%)

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.

Quiz me

0/3

  1. 1.Why did some shares trade at a penny during the flash crash?
  2. 2.What is the 'crucial distinction' between true market makers and HFT firms?
  3. 3.Why did HFT firms move from fibre-optic cables to microwave links?

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.

  1. [1]High-frequency trading · Wikipedia
  2. [2]2010 flash crash · Wikipedia
More lessons in 💰 Economics (3) See all economics lessons →

One more light on your map.

Get one lesson like this every day, about the things you love. Free, in two or five minutes.

Get the share card for this lesson ↗