The term "flash crash" gained popularity in 2010 when on May 6, the Dow Jones Industrial Average declined 9% in less than 5 minutes, and then quickly rebounded. This was driven in part by flash crashes in individual stocks. For example, Accenture (ACN) hit $0, but closed the day at $41.09, which was marginally down from the open. The term stuck, but while 2010 was the "big one," flash crashes still occur today. 2015 brought its share of flash crashes where price plunged spectacularly (and then rebounded) in a matter of minutes.
- Since the first such event in 2010 caused stocks in the U.S. to drop nearly 10% in just fifteen minutes, the term 'flash crash' has become common.
- Often attributed to the rise of algorithmic trading, flash crashes are now recognized as a semi-regular occurrence, sometimes affecting the broad market and other times just a single stock.
- In the year 2015, two significant flash crashes occurred: on March 18 and again on Aug. 24.
Monday, Aug. 24, 2015
This date is embossed on many trader's memories. The S&P 500 opened at 1965.15 and within minutes fell to a low of 1867.01, a 5% decline. Intraday the market gained back most of the loss, but toward the close of trading stocks fell again, ending the day 3.66% below the open. The S&P 500 is tracked by the SPDR S&P 500 (SPY) ETF.
The sell-off was fueled by a combination of factors. The main catalyst for the selling was that the market had already experienced strong selling on Aug. 20 and 21, leaving investors wary heading into the weekend. Asian markets open before US markets, and on Monday morning, the Chinese Shanghai Composite Index fell 8.5%, which led traders in U.S. markets to pull their buy orders and hit the sell button. With few bids, sell orders overwhelmed any buy order present, pushing prices lower. JP Morgan analyst Marko Kolanovic blamed a good part of that drop on a lack of liquidity in the marketplace, as well as a herd mentality held by traders desperate to buy protection against further market declines at any cost. Kolanovic noted that the seeds of the selloff were indeed planted the night before. On Sunday night, Aug. 23, a large drop in equities in Asia triggered a drop in index futures in Europe and the U.S. U.S. stock futures went down (7%) prior to the U.S. open.
Due to the lack of bids, many stocks on the NYSE were delayed in opening. But with some stocks trading and others not, the fair value of ETFs and futures products couldn't be established. This caused further unrest, causing traders to sell more and bid less in those initial moments of Aug. 24.
As the trading day got underway, more traders stepped into the market, and prices stabilized. The S&P 500 ultimately bounced off the Aug. 24 low and closed out 2015 at 2043.94.
Wednesday, March 18, 2015
This flash crash affected traders who were trading the US dollar, which fell more than 3% in under four minutes according to Nanex. However, most of the loss was erased in the next few minutes. For EUR FX (6E) futures, which are based on the EUR/USD exchange rate—it was the largest price swing within five minutes in the last four years. The Euro can also be traded via the CurrencyShares Euro (FXE) ETF.
The spot EUR/USD exchange rate traded at 1.0837 at 4 p.m. EST and went as high as 1.1040, a nearly 2% move in under five minutes with no specific catalyst. Since spot currency market are not traded on a centralized exchange, the moves seem by some traders could have been much larger based on their broker. Major currencies typically move 1% or less in a day, so a multiple percentage point move in minutes is highly irregular, especially at this time of day and without a news catalyst.
The flash crash occurred at 4:04 p.m. EST, four minutes after the official stock market close. At 2 p.m. EST was a Federal Open Market Committee (FOMC ) meeting, which caused the stock market to rally on news that an interest rate hike would be delayed (it didn't come till Dec. 2015). The Dow Jones Industrial Average (DJIA) closed the day 1.8% higher, and US dollar futures on the ICE exchange were down about the same. After the 4 p.m. market close the DJIA futures stayed steady, while the US dollar futures plunged, dropping another 3% from the 4 p.m. price. Little explanation, or even publicity, was given for the sudden move that was swifter than the moves caused by the FOMC announcement earlier in the day.
The Bottom Line
Flash crashes continue to occur, and these were two of the main ones in 2015. The Aug. 24 crash received a lot of media attention, likely because of the time of day it occurred (during the U.S. session) and because it affected so many retail investors. The US dollar flash crash on March 18 received almost no media attention, though, likely because it occurred outside normal market hours and thus mostly affected active and institutional traders, not retail investors. No matter who the flash crash affects, it's worrisome that it happens at all. Such events are the risk all traders and investors take when investing in financial markets, whether the events are publicized or not.