“The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished. In this paper, we argue that the ‘flash crash’ is the result of the new dynamics at play in the current market structure…”
“…whereas the normal distribution of the daily return of the S&P would suggest a negative three-sigma event (between -3.56% and -2.36% daily returns) should have occurred 27 days over the last one hundred years, this has actually occurred over a hundred times in the 81 years since 1927. And the “normal” likelihood of a negative four-sigma event is one day every one hundred years; yet we have seen this take place an astounding 44 times since 1927…”
On October 19, 1987 the DJIA dropped 508 points (-23%) in the largest single-day crash in history. This Nightly Business Report clip was broadcast that evening.
Interesting paper (commissioned by the UK government) on HFT’s contribution to Black Swans (click on title to open):
“This report thus suggests a largely positive answer to the question: “Can high frequency trading lead to crashes?” We believe it has in the past, and it can be expected to do so more and more in the future. Flash crashes are not fundamentally a new phenomenon, in that they do exhibit strong similarities with previous crashes, albeit with different specifics and of course time scales. As a consequence of the increasing inter-dependences between various financial instruments and asset classes, one can expect in the future more flash crashes involving additional markets and instruments. The technological race is not expected to provide a stabilization effect, overall. This is mainly due to the crowding of adaptive strategies that are pro-cyclical, and no level of technology can change this basic fact, which is widely documented for instance in numerical simulations of agent-based models of financial markets.”
An interesting overview of HFT and its influence on today’s markets (including its role in the Flash Crash):
“Speeds are increasing all the time. In Hasbrouck and Saar’s data, which come from 2007 and 2008, the salient unit of trading time was still the millisecond, but that’s now beginning to seem almost leisurely: time is often now measured in microseconds (millionths of a second). The London Stock Exchange, for example, says that its Turquoise trading platform can now process an order in as little as 124 microseconds. Some market participants are already talking in terms of nanoseconds (billionths of a second), though that’s currently more marketing hype than technological reality”
(click on title link for the article)
The S&P futures trading pit audio feed during the May 2010 Flash Crash.