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The events of May 6, 2010, continue to reverberate through the financial markets. The "flash crash" featured the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. Futures were also affected, with the price of E-mini S&P 500 futures collapsing by 5% between 2:30p.m. and 2:45p.m. (EDT), on top of the 2.97% it had already retreated intraday. This price drop was accompanied by an unusually large volume of transactions, as shown in Exhibit 1. Between 2:30p.m. and 3:00p.m., in excess of 1.1 million contracts were exchanged in ?-mini S&P 500 June 2010 futures alone (CFTC-SEC [2010a] pp. 6-7).' According to the testimony of Chris Nagy, TD Ameritrade Holding Corp's Managing Director of Order Routing, across both futures and equity markets "there was a complete evaporation of liquidity in the marketplace" (Spicer and Rampton [2010]).
Observers were quick to offer explanations for the flash crash:
1. Minutes after the crash, speculation was that a "fat-finger trade" in Procter & Gamble had triggered a cascade of stop loss orders. This explanation was shortlived because ?-mini S&P 500 tick data demonstrated that the market was already down by the time Procter & Gamble stock plummeted (Phillips [2010]).
2. Technical reporting difficulties at NYSE and ARCA as well as delays in the consolidated tape were alleged to have contributed to the market's free fall (Flood [2010]).
3. Some analysts blamed currency movements, in particular, changes in the U.S. dollar/Japanese yen exchange rate (Krasting [2010]).
4. The Wall Street Journal suggested a large purchase of put options by the hedge fund Universa Investments may have been the primary cause (Patterson and Lauricella [2010]).
5. Similar speculation centered on a sale of 75,000 ?-Mini contracts by Waddell & Reed as causing the futures market to dislocate.2
6. Nanex argued that a predatory practice called quote stuffing forced competitors to slow down their operations in order to catch up with the overwhelming amount of data to be processed by their algorithms.
The CFTC-SEC Staff Report on the market events of May 6, 2010, identified automated execution of a large sell order in the ?-mini contract as precipitating the actual crash. What then followed were "two liquidity crises - one at the...