What is the 2010 Flash Crash?
The 2010 Flash Crash is the market crash occurred on May 6, 2010. During the 2010 crash, leading US stock indices, including the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite Index, tumbled and partially rebounded in less than an hour. The day was distinguished by high volatility in trading of all available securities, including stocks, futures, options, and ETFs.
Although the market indices managed to partially rebound in the same day, the flash crash erased almost $1 trillion in market value.
Beginning in the morning, trading on major US markets on May 6, 2010 showed a negative trend. It was mainly due to concerns regarding the financial situation in Greece and the upcoming elections in the UK. By afternoon, the major indices of equities and futures were down by 4% from their previous day’s close.
By 2:30 p.m., trading was becoming extremely turbulent. The Dow Jones Industrial Average (DJIA) lost almost 1,000 points in around 10 minutes. However, in the next 30 minutes, the index recovered almost 600 points.
Other market indices across North America were also affected by the crash. The S&P 500 Volatility Index increased by 22.5% on the same day, while the S&P/TSX Composite Index in Canada lost more than 5% of its value in between 2:30 p.m. to 3:00 p.m.
By the end of the trading day, the major indices regained more than half of the lost values. Nevertheless, the crash took away around $1 trillion in the market value.
Investigation of the Flash Crash
After the flash crash, the US Securities and Exchange Commission (SEC) conducted an investigation of the possible causes of the unexpected market event. In September 2010, the SEC published a report containing the findings of its investigation.
According to the report, before the crash, the markets were particularly fragile and were exposed to extreme turbulence. The single selling order of the enormously large amount of E-Mini S&P contracts and subsequent aggressive selling orders executed by high-frequency algorithms triggered the decline in market prices, which was already accruing exponentially due to the prevailing negative market trends at that time.
The immense volatility compelled the high-frequency traders to halt their trading. The trading of E-Mini S&P contracts was paused to prevent it from further declines. When the trading of the contracts resumed, their prices started to stabilize. Shortly, the markets started to regain their positions as the prices of many securities returned to their initial levels.
The DJIA on May 6, 2010 (11:00 AM – 4:00 PM EST)
After the Flash Crash
The results of different investigations led to conclusions that the high-frequency traders played a significant role in the stock market crash. The aggressive selling and buying practices of a large volume of securities resulted in enormous price volatility in the financial markets. The activities of the high-frequency traders exacerbated the effects of the crash, leading to the declining liquidity and extreme volatility in the markets.
In 2015, London-based trader Navinder Singh Sarao was arrested following allegations of market manipulation that resulted in the flash crash. According to the charges, Sarao’s trading algorithm executed a number of large selling orders of E-Mini S&P contracts to push the prices down, which ultimately triggered the market crash.
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