Flash Crash

The flash crash was an event on May 6, 2010 that resulted in the stock market in the United States experiencing a trillion-dollar crash that lasted approximately 36 minutes.

The event has been extremely controversial since, ultimately resulting in new regulations being installed for investor protection.

The flash crash saw major US stock indices including the S&P 500, Dow Jones Industrial Average (DIJA), and the NASDAQ simultaneously collapse, while rebounding abruptly.

Overall, the event marks one of the most turbulent market periods ever in the United States. The cause of the flash crash has been debated, though generally is blamed for spoofing and market manipulation.

Fallout from the Flash Crash

In particular, the US Department of Justice outlined over twenty criminal counts, including fraud and market manipulation against Navinder Singh Sarao, a British financial trader.

These charges included the use of spoofing algorithms. For example, prior to the flash crash, he placed orders for thousands of E-mini S&P 500 stock index futures contracts, which he planned on canceling later.

These orders amounted to about $200 million worth of bets that the market would fall and were replaced or modified 19,000 times before they were canceled.

As a result, such practices of market spoofing, layering, and front running are now banned in a bid to curtail this behavior.

In a separate report, the US Commodity Futures Trading Commission (CFTC) concluded that Sarao was at least significantly responsible for the order imbalances in the derivatives market that contributed to the flash crash.

However, a separate CFTC report concluded that high-frequency traders likely did not cause the flash crash, though contributed to it by demanding immediacy ahead of other market participants.