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.

  1. Stock Market Crash

    A stock market crash is a rapid and often unanticipated drop ...
  2. Stock Market Crash Of 1987

    The stock market crash of 1987 was a rapid and severe downturn ...
  3. Flash Trading

    Flash trading is a controversial computerized trading practice ...
  4. Limit Down

    Limit down is the maximum amount by which the price of a commodity ...
  5. Flash Freeze

    A sudden shutdown in trading activity on an exchange. “Flash ...
  6. Market Disruption

    Market disruption is a circumstance where the regular functions ...
Related Articles
  1. Investing

    The Two Biggest Flash Crashes of 2015

    A flash crash occurs when prices plunge in minutes, and then often recover just as quickly. Here are two major flash crashes that occurred in 2015.
  2. Insights

    How to Prepare Your Portfolio for a Market Crash

    Being prepared for the next market crash will ensure you survive and perhaps even benefit from it.
  3. Financial Advisor

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  4. Investing

    The Silver Lining of a Stock Market Crash

    A stock market crash isn't always bad news for investors. Here is the silver lining.
  5. Trading

    The Crash Of 1929 - Could It Happen Again?

    Learn about the series of events that triggered the Great Depression.
  6. Investing

    Why The 1929 Stock Market Crash Could Happen In 2018

    Sound the alarm: per Nobel Laureate Robert Shiller's CAPE ratio, U.S. stocks are pricier than before the 1929 crash.
  7. Insights

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
  8. Tech

    GDAX to Pay Back Customers After Ethereum Flash Crash

    The two-year-old exchange aims to regain its customers' confidence.
  9. Tech

    Ethereum Flash Crash Panic, Price Briefly Dips to $13

    A flash crash of the cryptocurrency Ethereum triggered 800 stop loss orders.
  1. What caused Black Monday: The stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center