In modern finance, a flash crash is a very rapid, deep, and volatile fall in

security Security is protection from, or resilience against, potential harm (or other unwanted coercion). Beneficiaries (technically referents) of security may be persons and social groups, objects and institutions, ecosystems, or any other entity or ...

prices occurring within a very short time period followed by a quick recovery. Flash crashes are frequently blamed by media on

trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. Traders generally negotiate through a medium of cr ...

s executed by black-box trading, combined with

high-frequency trading High-frequency trading (HFT) is a type of algorithmic trading in finance characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.Lin, Tom C. W. " ...

, whose speed and interconnectedness can result in the loss and recovery of billions of dollars in a matter of minutes and seconds, but in reality occur because almost all participants have pulled their liquidity and temporarily paused their trading in the face of a sudden increase in risk.

Occurrences

Examples of flash crashes that have occurred: * May 6, 2010, flash crash * April 23, 2013, flash crash * Frankenshock, or Flash Crash

Swiss Franc The Swiss franc, or simply the franc, is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) iss ...

on January 15, 2015 * Flash Crash of the

British Pound Sterling (Currency symbol, symbol: Pound sign, £; ISO 4217, currency code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of account, unit of sterling, and the word ''Pound (cu ...

on October 6, 2016 *Flash Crash of

Japanese Yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro. Th ...

on January 2, 2019 * Flash Crash of European Stock Markets on May 2, 2022.

2010 flash crash

This type of event occurred on May 6, 2010 in the United States. A $4.1 billion trade on the New York Stock Exchange (NYSE) resulted in a loss to the

Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indice ...

of over 1,000

points A point is a small dot or the sharp tip of something. Point or points may refer to: Mathematics * Point (geometry), an entity that has a location in space or on a plane, but has no extent; more generally, an element of some abstract topologica ...

and then a rise to approximately previous value, all over about fifteen minutes. The mechanism causing the event has been heavily researched and is in dispute. On April 21, 2015, the U.S. Department of Justice laid "22 criminal counts, including fraud and market manipulation" against Navinder Singh Sarao, a trader. Among the charges included was the use of spoofing algorithms.

2017 Ethereum Flash Crash

On June 22, 2017, the price of

Ethereum Ethereum is a decentralized blockchain with smart contract functionality. Ether (abbreviation: ETH) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-s ...

, the second-largest digital

cryptocurrency A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership record ...

, dropped from more than $300 to as low as $0.10 in minutes at GDAX exchange. Suspected for

market manipulation In economics and finance, market manipulation occurs when someone intentionally alters the supply or demand of a security to influence its price. This can involve spreading misleading information, executing misleading trades, or manipulating ...

or an account takeover at first, later investigation by GDAX claimed no indication of wrongdoing. The crash was triggered by a multimillion-dollar selling order which brought the price down, from $317.81 to $224.48, and caused the following flood of 800 stop-loss and margin funding liquidation orders, crashing the market.

British pound flash crash

On October 7, 2016, there was a flash crash in the value of sterling, which dropped more than 6% in two minutes against the US dollar. It was the pound's lowest level against the dollar since May 1985. The pound recovered much of its value in the next few minutes, but ended down on the day's trading, most likely due to market concerns about the impact of a " hard Brexit"—a more complete break with the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

following Britain's 'Leave' referendum vote in June. It was initially speculated that the flash crash may have been due to a fat-finger trader error or an

algorithm In mathematics and computer science, an algorithm () is a finite sequence of Rigour#Mathematics, mathematically rigorous instructions, typically used to solve a class of specific Computational problem, problems or to perform a computation. Algo ...

reacting to negative news articles about the

British Government His Majesty's Government, abbreviated to HM Government or otherwise UK Government, is the central government, central executive authority of the United Kingdom of Great Britain and Northern Ireland.

's European policy.

USD-JPY and AUD-USD flash crash

On January 2, 2019, a flash crash was seen in the value of the

United States dollar The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, currency code: USD) is the official currency of the United States and International use of the U.S. dollar, several other countries. The Coinage Act of 1792 introdu ...

(USD) vs the

Japanese yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro. Th ...

(JPY) and the

Australian dollar The Australian dollar (currency sign, sign: $; ISO 4217, code: AUD; also abbreviated A$ or sometimes AU$ to distinguish it from other dollar, dollar-denominated currencies; and also referred to as the dollar or Aussie dollar) is the official ...

(AUD) vs USD, which dropped more than 4% in a few minutes. It was the USD lowest level against the yen and AUD against USD since March 2009. The USD-JPY and AUD-USD recovered much of their value in the next few minutes. It was speculated that the flash crash may have been due to

Apple Inc. Apple Inc. is an American multinational corporation and technology company headquartered in Cupertino, California, in Silicon Valley. It is best known for its consumer electronics, software, and services. Founded in 1976 as Apple Comput ...

reporting reduced sales forecast in China but this seems unlikely as the report came out an hour before the actual crash. The lows reported on USD-JPY also varied with Reuters reporting a low of 104.90 on USD-JPY while FXMarketAPI reported a low of 104.45.

Flash Crash of European Stock Markets on May 2, 2022

On May 2, 2022, from 9:56 to 10:01 CET the Swedish OMXS30 index dropped 6.8%, the Norwegian OBX 4.1%, the Danish OMXC25 -6.7% and the Finnish OMXH25 -7.5%. Other European indices dropped too, although not as severely as the Nordic exchanges. The German DAX dropped 1.6% and the European STOXX 600 2.2%. At their lowest point around €300bn or $315bn had been erased from the markets. The indices quickly rebounded to levels at or slightly below what it was before the crash. A spokesperson for Nasdaq said the crash was not because of internal server errors or hacker attacks. Nasdaq stated that trades done during the crash would not be cancelled on the exchanges that it operates. There were rumors that

Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...

had accidentally sold a large basket of European stocks over the market. Later in the afternoon Nasdaq confirmed that the flash crash was due to a very large accidental sell order by a market participant, a so-called fat-finger error. Nasdaq would not comment which market participant it was. Later in the day

admitted that the crash was caused by "an error when inputting a transaction" by one of its traders at their London trading desk.

Other crashes

In October 2013, a flash crash occurred on the

Singapore Exchange Singapore Exchange Limited (SGX Group) is a Singapore-based exchange conglomerate, operating Equity (finance), equity, fixed income, currency and commodity markets. It provides a range of listing, trading, clearing, settlement, depository and ...

which wiped out $6.9 billion in

capitalization Capitalization ( North American spelling; also British spelling in Oxford) or capitalisation (Commonwealth English; all other meanings) is writing a word with its first letter as a capital letter (uppercase letter) and the remaining letters in ...

and saw some

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s lose up to 87 percent of their value. The crash resulted in new regulations being announced in August 2014. Minimum trading prices of 0.20 cents per share would be introduced,

short position In finance, being short in an asset means investing in such a way that the investor will profit if the market value of the asset falls. This is the opposite of the more common long position, where the investor will profit if the market value ...

s would be required to be reported, and a 5 percent collateral levy implemented. The exchange said the measures were to curb excessive

speculation In finance, speculation is the purchase of an asset (a commodity, good (economics), goods, or real estate) with the hope that it will become more valuable in a brief amount of time. It can also refer to short sales in which the speculator hope ...

and potential share price manipulation. Two short-lived (less than a second) movements (more than 1%) in several (40 and 88) stock prices followed by recovery were reported for November 25, 2014.

Significance of recovery

Events described as flash crashes typically exhibit a rapid partial or total price rebound. Conversely, rapid price falls in response to adverse news (e.g. disappointing earnings announcements) which do not rapidly revert are simply crashes or, colloquially, falling knives.

References

External links

* * *
Aftershocks and Fragility: Ten Years in Financial Markets

Financial TimesThe Stock Market Was Rocked by a Mysterious ‘Flash Crash’ Five Years Ago. What You Need to Know
- Barron's {{Financial crises Economic crises Financial markets