2010 Flash Crash Definition and Brief History

The 2010 flash crash was May 6, 2010; at one point during the day the S&P 500 index was down 98.59 points (to a low of 1065.79) from the opening price (1164.38). It was one of the largest intraday swings (difference between daily high and daily low) ever recorded at 101.79 points, or 9.55%.

The day started normally, but as the day progressed selling escalated starting at about 2:30 PM EST. Between about 2:30 and 2:45 is when the majority of the selling occurred; in that 15 minute span the S&P 500 declined about 7%.  This wasn’t a downtrend that lasted all day, it was a very sharp uncharacteristic decline.

The chart above shows the S&P 500 had been declining throughout the day, but just before 2:45 there’s a massive acceleration in selling.

Here is another chart of the iShares MSCI Japan ETF (EWJ)–typically a slow moving ETF–which fell about 6% in a matter of minutes.

All stocks were affected, but some radically so. For brief moments Exelon Corp (EXC) traded at $0.00; it opened at $43.35 and closed the day at $41.86. Accenture (ACN) opened at $41.94, hit $0.00, then closed at $41.09. Impax Laboratories (IPXL) opened at $18.48, went to $0.00, then closed at $17.78. In a strange twist, Sotheby’s (BID) opened at $34.61, hit $100,000, and closed at $33.

Here is a play-by-play of the action, as it was happening:

The selloff was sharp and fast, but not long-lived. The cause of the crash has been linked to high-frequency trading, and large sell orders which then created a domino effect of smaller traders or algorithms buying into those sell orders. As the selling continued these smaller traders and algorithms were forced to exit, becoming sellers themselves at lower and lower prices. By the end of the day much of the earlier losses were erased; the S&P 500 closed at 1128.15, down 36.23 points (3.1%) from the open.

The next day markets fell a bit lower, but then surged higher on May 10. May 12 saw the price close above the day high of May 6 (2010 flash crash day).

The chart below shows the 2010 flash crash in a larger context. The S&P 500 was rallying off the low of 666.79 from the 2008 crash (financial crisis). The market was in an overall uptrend, but had recently peaked on April 26 at 1219.8. On April 27 volatility escalated as the S&P 500 dropped 2.3%. This was followed by drops of 1.7% on April 30 and 2.4% on May 4. Selling was escalating as May 6 approached. While the market did rebound briefly after May 6, the selling ultimately continued until July 1 when the S&P 500 bottomed at 1010.91, well below the flash crash day low (May 6) of 1065.79.

Further Reading on the 2010 Flash Crash

Nanex: Nanex Flash Crash Summary Report

The Economist: What Caused the Flash Crash?

WSJ: Breakdown: A Glimpse Inside the ‘Flash Crash’