2010 Flash Crash

The 2010 Flash Crash occurred on May 6 between 2:32 and 2:45 PM Eastern time, when major U.S. stock indices experienced their largest intraday decline since the 1987 Black Monday crash. The Dow Jones Industrial Average dropped nearly 1,000 points within minutes before recovering most losses by market close.

The crash began when a large institutional trader executed a $4.1 billion sell order for E-Mini S&P 500 futures contracts using an algorithm designed to trade 9% of trading volume without regard to time or price. This selling pressure overwhelmed the market’s ability to absorb the volume, triggering automated responses from high-frequency trading systems.

As prices declined rapidly, many algorithmic trading programs withdrew from the market or began selling, creating a feedback loop that accelerated the decline. Market makers reduced their positions, further reducing liquidity when it was most needed.

The Securities and Exchange Commission and Commodity Futures Trading Commission investigation identified Navinder Sarao, a London-based trader, as having contributed to market conditions through “spoofing”—placing and canceling large orders to manipulate prices. Sarao’s activities, while significant, occurred against the backdrop of structural market vulnerabilities.

The crash exposed the fragility of modern electronic trading systems and the potential for computer-driven trading to amplify market volatility. Individual stocks experienced extreme price movements, with some blue-chip companies trading for pennies or tens of thousands of dollars per share.

Regulatory responses included implementing circuit breakers to pause trading during extreme price movements and revising market maker obligations during volatile periods. The incident highlighted ongoing debates about high-frequency trading’s role in modern markets.