2010 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.

Room: Q4 Where models die
Year: 2010
Impact: $1T
Sector: Equity markets
Region: N. America
Category: Economic

Why this room

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 book

This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.

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