WHAT IS 'Splash Crash'

Splash crash is a term for the hypothetical, larger, more intense and wider-reaching version of the flash crash that occurred on May 6, 2010, when the Dow Jones Industrial Average suddenly dropped by almost 1,000 points and then recovered almost 600 points within minutes. A splash crash is a term coined for an event that was feared in the wake of the flash crash of 2010, even though there was no lasting damage to the market after the flash crash. A splash crash would "splash" onto other markets and could affect equities markets, foreign exchange, bonds, commodities and other markets.

BREAKING DOWN 'Splash Crash'

Splash crash was a term first referenced in the article "Ready for 'Splash Crash,' The Ultimate Market Meltdown?" by Jeff Cox, published on MSNBC.com on February 3, 2011. Ten months after the big flash crash of 2010, analysts and traders were afraid not only of another flash crash, but of a bigger crash that could spread across many types of markets, what John Bates of Progress Software referred to as a splash crash. While a splash crash did not yet exist, fear of a splash crash was rampant. The irony of this is that there were almost no lasting repercussions to the market of the flash crash of 2010, except that more safety measures were instituted to prevent another flash crash from occurring, including circuit breakers. The huge drop of almost 1,000 in a few minutes was still traumatizing to traders and analysts who had been in the industry at the time, even though the market recovered by 600 points almost instantly. The biggest danger and the factor that caused the flash crash to become huge instead of just a small midday dip was the sudden lack of liquidity that caused traders to call to get their money back. This paranoia was the perfect setting for the fear of a splash crash to develop.

Fear of a Splash Crash

The fear of a splash crash exposed the fear that the market could be so easily destroyed in such a short time, along with the fear and guilt that there was no one clear cause of the flash crash.Since there were no lasting effects on the market, it was not unreasonable to think that even if a splash crash happened, all the markets involved in it could recover quickly and without lasting repercussions. But the idea that the market was more vulnerable than traders had previously admitted was hard to swallow. In the intervening years, fears of both flash crashes and splash crashes has receded, and analysts have discovered that there is, on average, one flash crash every day somewhere in the world.

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