On May 6, 2010, the Dow was already down more than 300 points for the day on worries about the debt crisis in Greece. At 2:42 p.m., the equity market began to fall rapidly, dropping an additional 600 points in 5 minutes for a loss of nearly 1,000 points for the day by 2:47 p.m. Temporarily, $1 trillion in market value disappeared.
Twenty minutes later, by 3:07 p.m., the market had regained most of the drop.
This day is referred to as the Flash Crash of 2010.
The spark of this particular crash came down to one British trader named Navinder Singh Sarao, dubbed the ‘Hound of Hounslow.’ Sarao was convicted after pleading guilty to charges of spoofing and market manipulation in 2016. Sarao allegedly used an automated program to generate large sell orders, pushing down prices, which he then cancelled to buy at the lower market prices. The rapid decline in price triggered large numbers of automated trading to take place as prices broke through pre-determined thresholds.
A joint SEC/CFTC report portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.
Activities such as spoofing, layering and front running were banned by 2015 and new trading curbs were set.
The Flash Crash is thought to have wiped off $1 trillion in equity and while the Dow recovered, it only managed to regain about 70% of the lost value by the end of the day – demonstrating the severe impact these events can have.
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