Quick definition A flash crash is a sudden, severe market decline lasting only minutes to hours. Prices fall dramatically then recover. The most famous example is the 2010 Flash Crash when the S&P 500 fell 9 percent in about 20 minutes. What it is A flash crash is distinct from a normal market decline because: - It occurs very quickly (minutes, not days) - The decline is severe (often 5-10 percent) - Prices recover rapidly - Liquidity may disappear during the crash Flash crashes reveal fragility in market structure. They show that under stress, market makers withdraw and liquidity evaporates. The 2010 Flash Crash On May 6, 2010, the S&P 500 fell 9 percent in about 20 minutes, wiping out 1 trillion dollars of market value. Prices then recovered within hours. Investigation revealed that a large sell order from a mutual fund triggered a cascade of algorithmic selling, which overwhelmed liquidity and scared market makers out of the market. Causes Flash crashes typically involve: - A large order that moves the market significantly - Algorithmic selling that cascades - Market makers withdrawing (refusing to quote) - Liquidity evaporating - Prices falling in a feedback loop Impact Flash crashes are concerning because they: - Cause sudden investor losses - Create market instability - Damage market confidence - Are often followed by regulatory investigations Prevention After the 2010 Flash Crash, regulators implemented circuit breakers to halt trading if prices decline too rapidly. These are intended to prevent flash crashes by giving traders time to reassess. See also - Circuit Breaker - Volatility - Algorithmic Trading - Market Stability
