2010 Flash Crash: Causes, Impact, and Lessons Learned

The 2010 Flash Crash is the market crash that occurred on May 6, 2010. During the 2010 crash, leading US stock indices, including the Dow Jones Industrial AverageDow Jones Industrial Average (DJIA)The Dow Jones Industrial Average (DJIA), also referred to as "Dow Jones” or "the Dow", is one of the most widely-recognized stock market indices., 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 types of securities, including stocksStockWhat is a stock? An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms "stock", "shares", and "equity" are used interchangeably., futures, options, and ETFsExchange Traded Fund (ETF)An Exchange Traded Fund (ETF) is a popular investment vehicle where portfolios can be more flexible and diversified across a broad range of all the available asset classes. Learn about various types of ETFs by reading this guide..

Although the market indices managed to partially rebound in the same day, the flash crash erased almost $1 trillion in market value.

2010 Flash Crash: Main Events

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 futuresFutures ContractA futures contract is an agreement to buy or sell an underlying asset at a later date for a predetermined price. It’s also known as a derivative because future contracts derive their value from an underlying asset. Investors may purchase the right to buy or sell the underlying asset at a later date for a predetermined price. 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 Flash 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 Flash Crash took away around $1 trillion in the market value.

Investigation of the 2010 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 flash crash, the markets were particularly fragile and were exposed to extreme turbulence. A single selling order of an enormously large amount of E-Mini S&P contracts and subsequent aggressive selling orders executed by high-frequency algorithms triggered the massive decline in market prices, which was already accruing exponentially due to prevailing negative market trends at that time.

The immense volatility compelled many 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. The markets started to regain their positions as the prices of many securities returned to near 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 of the 2010 Flash Crash led to conclusions that the high-frequency traders played a significant role in the crash. The aggressive selling and buying of large volumes of securities resulted in enormous price volatility in the financial markets. At minimum, the activities of high-frequency traders exacerbated the effects of the crash.

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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