Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today's Macro Risk On/Risk Off Financial Environment

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The Flash Crash

On May 6, 2010 just after 2.30pm Eastern Daylight Time, the Dow Jones Industrial Average (DJIA) plunged by about 1000 points – or about 9% – only to recover those losses within minutes. It was the second largest point swing, 1010 points, and the biggest one-day point decline, 998 points, on an intraday basis, in the index’s history.

Temporarily, $1 trillion in market value disappeared. The stocks of several companies in the S&P 500 fell to one cent per share for a short time, including Accenture and Center Point Energy, while other stocks, including Sotheby’s, Apple, and Hewlett-Packard, increased in value to over $100,000 in price. Procter & Gamble (PG) a component of the Dow Jones Industrial Average (DJIA) plummeted by 37% before rebounding, within minutes, back to more or less its original levels.

In order to understand the circumstances surrounding this event which has come to be known as the Flash Crash – although in truth it should better be described as a temporary systemic breakdown – it is necessary to give the reader a little background to the financial instruments that will be referenced in the ensuing analysis of the crash and also to make references to a document prepared by the US securities regulatory authorities who investigated this remarkable market event. The document entitled Findings regarding the market events of May 6, 2010, represents the report of the staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues ...