The 2010 flash crash: what happened on May 6, 2010 and what caused it

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The 2010 flash crash was a sudden plunge and rebound in US stock and futures prices on the afternoon of May 6, 2010. Major indices that were already down more than 4% on the day fell a further 5-6% in a matter of minutes, then recovered almost as quickly and closed about 3% lower.

It was the first big crash of the age of fully automated trading, and the shortest in our list of stock market crashes. Most of what is known about it comes from a joint report by the staffs of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), published on September 30, 2010.

What happened on May 6, 2010?

The day began badly. News about the European debt crisis unsettled markets from the open, the cost of insuring against a Greek government default rose, and around 1 p.m. the euro began falling sharply against the dollar and the yen. By 2:30 p.m. the VIX volatility index was up 22.5% from its opening level and the Dow Jones Industrial Average was down about 2.5%. Buy-side liquidity in the E-Mini S&P 500 futures contract (the E-Mini) had fallen 55% from the morning.

In the four and a half minutes from 2:41 p.m. to 2:45:27 p.m., the E-Mini fell by more than 5% and SPY, the large exchange-traded fund that tracks the S&P 500, by more than 6%. Individual stocks were hit harder. Many of the almost 8,000 stocks and ETFs traded that day fell 5%, 10% or even 15% before recovering, and some traded at a penny or as high as $100,000.

What caused the flash crash?

The CFTC-SEC report traced the start to a single sell order in a fragile market.

An automated sell order that ignored price

At 2:32 p.m. a mutual fund complex, which the report does not name, began selling 75,000 E-Mini contracts as a hedge for an existing stock position. It used an algorithm set to sell 9% of the previous minute's trading volume, with no regard to price or time. When the same trader had run a sell program of that size before, it took more than five hours to sell the first 75,000 contracts. On May 6 the algorithm ran through the program in about 20 minutes, and sold about 35,000 contracts, worth about $1.9 billion, between 2:32 p.m. and 2:45 p.m. alone.

A "hot potato" among fast traders

High-frequency traders and other intermediaries bought many of the early contracts and then sold them on quickly to cut their positions. In the 14 seconds before 2:45:27 p.m. they traded over 27,000 contracts, about 49% of all volume, while adding only about 200 contracts net. The report calls this a "hot-potato" effect: the same positions passed back and forth, so volume rose while real buying did not. Buy-side depth in the E-Mini fell to about $58 million, less than 1% of its morning level.

Stocks with no buyers

The selling spread to stocks through traders who buy futures and sell shares when the prices diverge. Many market makers then pulled back. Orders to sell "at the market" found no buyers near the last price and were filled against stub quotes, placeholder bids set far away from the market to meet quoting obligations. That is how some shares traded for a penny.

What role did Navinder Sarao play?

In April 2015 the CFTC charged Navinder Singh Sarao, a UK-based trader, and his company with manipulation and spoofing in E-Mini S&P 500 futures. Spoofing means placing orders you intend to cancel, to move the price. Sarao pleaded guilty in November 2016 to one count of spoofing and one count of wire fraud in a related criminal case. A federal court in Chicago ordered him that month to pay more than $38 million in civil penalties and disgorgement. The CFTC states that his actions contributed to an extreme order book imbalance in the E-Mini on May 6, 2010, and that the resulting loss of liquidity, together with other market events, directly contributed to the price crash. The 2010 staff report, written before the case, does not mention him.

What changed after the flash crash?

Regulators responded within weeks. The exchanges and FINRA canceled every trade executed 60% or more away from its 2:40 p.m. price. In June 2010 the SEC approved a pilot of single-stock circuit breakers for S&P 500 stocks, pausing a stock for five minutes after a 10% move in five minutes, and later extended it; by June 2011 it covered all NMS stocks. New, more objective rules for breaking erroneous trades followed.

The longer-term answer was limit up-limit down, approved by the SEC on May 31, 2012. It blocks trades in a stock outside price bands of 5%, 10% or 20% (depending on the stock's price), and pauses trading for five minutes if the price does not return within the band in 15 seconds. It took effect for S&P 500 and Russell 1000 stocks on April 8, 2013 and for all others on October 8, 2013. Separately, from February 4, 2013, the market-wide circuit breakers were reset to S&P 500 falls of 7%, 13% and 20%. Those were the halts triggered four times in March 2020, as described in our page on the 2020 crash. The first circuit breakers had been created after Black Monday 1987.

The flash crash left no lasting mark on prices; most of the fall was recovered within the same afternoon. It mattered because it showed how quickly liquidity can disappear when many automated traders step back at once, a point the CFTC-SEC report makes directly: high trading volume is not necessarily a reliable indicator of liquidity. Our page on market corrections explains the slower kinds of decline that shape most investors' experience.

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