Intelligence

Six years later, ‘flash crash’ worth remembering

ishviene

Ishviene Arora

COO

flash-crash-vested
Six years ago today, the “flash crash” set off a historic day of trading in which more than a trillion dollars of value was lost in 36 minutes.

You can’t burn money that fast.

It began when an algorithm initiated the sale of 75,000 futures contracts. To this day, no one knows why it did this.

What followed was a cascade, then an avalanche, then an earthquake, which The New York Times summarized using an SEC/CFTC report issued later that year:

“Normally, a sale of this size would take place over as many as five hours, but the large sale was executed in 20 minutes, the regulators said. …

“After the firm started to sell, the report found, many of the contracts were bought by high-frequency traders, computerized traders who buy and sell at high speed and account for a big part of trading in today’s markets.

“As they detected that they had amassed excessive ‘long’ positions, they began to sell aggressively, which caused the mutual fund’s algorithm in turn to accelerate its selling.

“Startlingly, as the computers of the high-frequency traders traded contracts back and forth, a ‘hot potato’ effect was created, the report said, as contracts changed hands 27,000 times in 14 seconds, but with eventually only 200 actually being bought or sold.

“The selling pressure was then transferred from the futures markets to the stock market by arbitrageurs who started to buy the cheap futures contracts but sell cash shares on markets like the New York Stock Exchange.

“Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling. Altogether, this led to the abrupt drop in prices of individual stocks and other financial instruments like exchange-traded funds, and caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000.

“The rout continued until an automatic stabilizer on the futures exchange cut in and paused trading for five seconds, after which the markets recovered.”

After that, stability returned — and the S&P 500 is up nearly 73% since the flash crash.

While the markets recovered quickly, the flash crash was a fascinating example of the true power that technology holds over the markets. Our modified logo above commemorates an incident that the financial world will never forget.

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