Splash Crash

DEFINITION of 'Splash Crash'

A hypothetical, more intense version of the flash crash that occurred on May 6, 2010, when the Dow Jones Industrial Average suddenly dropped by almost 1,000 points then recovered about 600 points within minutes. A splash crash is an extreme version of the flash crash which hypothetically would affect not just the equities markets, but also splash over into forex, commodities, bonds and other asset classes.

BREAKING DOWN 'Splash Crash'

The idea is that because of the interconnectedness of the financial markets and the use of high-speed trading platforms, a huge drop in one market could affect other markets. A splash crash could freeze exchanges, cause market liquidity to spontaneously evaporate and have a long-term detrimental effect on investor confidence. Market surveillance and intelligent algorithms that detect and respond quickly to market irregularities attempt to ward off such events and minimize the damage, if they do occur.