Risk register · entry
Q4 · Where models die2010 Flash Crash
The models assumed a buyer would always be there. For 36 minutes, there was none.
The world stops matching the model. Regime change and leverage turn a small error fatal.
Why this quadrant
The event is classified where models die because the failure was an assumption about the world, not a broken component. The executing algorithm was instructed to target 9 percent of trailing trading volume with no regard to price or time, a rule that is well behaved only while volume is a proxy for liquidity. In the regime that formed after 2:32 p.m. that assumption inverted: high-frequency participants passed the same contracts back and forth in a "hot potato" loop, so volume rose while buy-side depth collapsed, and the algorithm read the rising volume as permission to sell faster. Buy-side market depth in the E-Mini fell to about $58 million, under 1 percent of that morning's level, and stub quotes cleared trades at a penny and at $100,000.
The record
- At 2:32 p.m. a large fundamental trader (a mutual fund complex) initiated a program to sell 75,000 E-Mini S&P 500 contracts, valued at approximately $4.1 billion, executed by an algorithm targeting 9% of trailing-minute volume without regard to price or time.certain
- Buy-side market depth in the E-Mini fell to about $58 million, less than 1% of its level that morning; by 2:45:28 there were fewer than 1,050 contracts of buy-side resting orders.certain
- Between 2:45:13 and 2:45:27, a 14-second window, high-frequency traders traded over 27,000 E-Mini contracts, about 49% of total volume, while net buying only about 200 contracts.certain
- Over 20,000 trades across more than 300 securities were executed at prices more than 60% away from their 2:40 p.m. values, some as low as one penny and some as high as $100,000 per share.certain
- Roughly $1 trillion in market value is commonly said to have been temporarily erased; this figure appears in press accounts, not in either official report.medium
Sources
The newsletter
One risk story a week, taken apart the way this one was: what was known, what was ignored, and which quadrant it really belonged to.
No spam, one email a week.