The 2010 Flash Crash: what happened on May 6 and what changed

On the afternoon of May 6, 2010, US stock prices fell with startling speed and then recovered almost as fast. Within roughly a quarter of an hour, the Dow Jones Industrial Average dropped about 9%, nearly 1,000 points, from the previous close, and hundreds of individual stocks and exchange-traded funds traded at absurd prices, some for one cent a share and some for $100,000. By the close the Dow was down 3.2%. The episode became known as the Flash Crash.

Nothing fundamental changed in those minutes. No company failed, no data surprised. The Flash Crash was a failure of liquidity: for a short time almost nobody was willing to buy, and automated orders kept selling into the void. This article follows the timeline in the joint report by the staffs of the Commodity Futures Trading Commission and the SEC, explains why prices broke down, and describes the rules that came out of it, above all the single-stock Limit Up-Limit Down bands.

The setting

May 6 was already a nervous day. The European debt crisis was the main news, with fears about Greece's ability to pay its debts. The euro fell against the dollar and the yen through the early afternoon, and by 2:30 p.m. the VIX volatility index was up 22.5% from its opening level, according to the staff report. The major indexes were already down more than 4% from the previous day's close before the sharpest fall began.

In that state, the people who normally stand ready to buy, market makers and high-frequency trading firms, were becoming cautious. The amount of buy orders resting in the order books of both the futures and the stock markets was shrinking.

Timeline of the afternoon

2:32 p.m. The sell program begins. A large mutual-fund complex started selling 75,000 E-mini S&P 500 futures contracts, worth about $4.1 billion, to hedge an existing stock position. The report does not name it; the firm was later widely identified in the press. It used an execution algorithm set to sell at 9% of the previous minute's trading volume, without any limit on price or time. On an earlier occasion, the same trader had taken more than five hours to sell a similar amount. On May 6 the algorithm finished in about 20 minutes, because as volume rose, it sold faster.

2:41 to 2:45:27 p.m. The free fall. High-frequency traders initially bought the contracts, then began to sell them quickly to each other and to anyone else, which pushed volume up and told the algorithm to sell even more. In those four and a half minutes, E-mini prices fell more than 5% and SPY, the S&P 500 ETF, more than 6%. At the bottom, buy orders resting in the E-mini book were less than 1% of their level at the start of the day.

2:45:28 p.m. A five-second pause. The Chicago Mercantile Exchange's Stop Logic Functionality, an automatic safeguard, halted E-mini trading for five seconds. When trading resumed at 2:45:33, selling pressure had eased, buyers returned, and futures began to climb.

2:45 to 3:00 p.m. Chaos in individual stocks. The futures market recovered first. Many individual stocks and ETFs kept falling, partly because retail stop-loss orders triggered as prices dropped and turned into market orders with nobody on the other side. Some market orders filled against stub quotes: placeholder bids of a penny, or offers of $100,000, that market makers posted only to meet their obligation to quote both sides. That is how Accenture traded at a cent, down from about $40.

4:00 p.m. The close. Most prices had recovered to where they stood before the plunge or better; the major indexes ended about 3% down on the day. The Dow closed at 10,520.32, down 347.80 points.

Why prices broke down

The staff report's key point is that a large sell order, by itself, should not cause a crash. Big funds sell billions of dollars of futures without incident. What made May 6 different was the combination:

• An already stressed market. Volatility was high and liquidity was thinning before the sell program started.
• An order with no price limit. The algorithm cared only about volume. When the market churned, it read the churn as room to sell more.
• Liquidity that evaporated. Market makers and high-frequency firms are not obliged to buy in a falling market. Many paused or withdrew as prices became erratic, some because their own risk systems shut them down when the data looked unreliable.
• Stock and futures markets that pass shocks back and forth. Arbitrage traders bought the cheap futures and sold SPY and baskets of stocks, carrying the decline into the stock market.
• Market orders and stop orders. Orders that buy or sell "at any price" filled at any price. The Market vs limit orders: price certainty vs getting filled and Stop and stop-limit orders: triggers, gaps and non-fill risk guides explain why a limit price matters most in exactly these moments.

The cleanup: broken trades

After the close, the exchanges and FINRA cancelled, or "broke," trades executed more than 60% away from their reference prices between 2:40 and 3:00 p.m. under their clearly erroneous trade rules. That protected the people whose orders filled at a penny, but not those whose stop orders sold at, say, 30% below the earlier price, which was a real loss. The arbitrary line was itself a lesson: investors could not know in advance which trades would stand.

What changed afterward

The Flash Crash rewired US market structure more than any event since 1987.

LULD replaced the single-stock breakers and is the mechanism that most often stops a sudden price spike or collapse in one stock today. How its bands and pauses work, with the current percentages, is covered in Trading halts and Limit Up-Limit Down (LULD) pauses explained. On May 6 the Dow fell about 9%, short of the 10% trigger of the old Dow-based market-wide breakers, which is why those rules did not fire; the redesigned S&P 500 levels are described in Market-wide circuit breakers: the 7%, 13% and 20% halt rules.

The spoofing case

In April 2015, US authorities charged a London-based futures trader, Navinder Sarao, with manipulating the E-mini market in the period including May 6, 2010, using spoofing: placing large orders he intended to cancel to create a false picture of supply. He pleaded guilty in November 2016 to one count of spoofing and one of wire fraud, according to the Justice Department. His activity was not a focus of the 2010 staff report, and how much it contributed to the crash itself remains debated. The case did show that the tools to reconstruct and police fast markets were still incomplete five years later.

Lessons for investors

• Liquidity can vanish in minutes. A quoted price is only an offer, and the people posting it can leave. That risk is larger in thinly traded stocks and in ETFs whose underlying holdings are hard to price quickly.
• Use limit prices. Market and plain stop orders guarantee execution, not price. In a disorderly market that trade-off works against you.
• Fast falls are not always informative. The Flash Crash said nothing about the value of US companies. That does not mean every fast drop will reverse.
• Rules are a backstop, not a guarantee. LULD and circuit breakers slow things down and give buyers time to appear. They cannot set a price.

How Finabase helps

The trending page lists the most active stocks right now, the kind of names where sudden volume can come with sudden gaps, and every symbol page shows the bid, ask, volume and day range so you can judge liquidity before placing an order with your broker. Our stored daily history begins in October 2024 and our intraday data does not reach 2010, so the May 6, 2010 figures on this page are published values. The SPY monthly chart does include May 2010, when the month's range was unusually wide for a month that ended down about 8%.

Frequently asked questions

What caused the 2010 Flash Crash?

The CFTC–SEC staff report traced it to a $4.1 billion E-mini futures sell program, executed by an algorithm that ignored price and time, hitting a stressed, thinning market. Liquidity providers pulled back, and the decline spread from futures to stocks and ETFs.

How far did the Dow fall in the Flash Crash?

From its May 5 close of 10,868.12 to an intraday low of 9,869.62 on May 6, 2010, a drop of 998.50 points or about 9.2%. It closed at 10,520.32, down 3.2%.

Were trades cancelled after the Flash Crash?

Yes. Exchanges and FINRA broke trades executed between 2:40 and 3:00 p.m. at prices more than 60% away from their reference prices. Trades at smaller deviations stood.

Could a flash crash happen again?

Smaller ones have, in single stocks and ETFs. Since 2013 the Limit Up-Limit Down bands pause a stock that moves too far within five minutes, which makes a repeat of penny and $100,000 prints in large stocks much less likely, but not impossible.

Summary

On May 6, 2010, a $4.1 billion futures sell program, run by an algorithm that cared only about volume, met a market already short of buyers. The Dow fell about 9% in minutes, individual stocks traded at a penny or $100,000, and most of it reversed by the close. The episode led to single-stock circuit breakers, a ban on stub quotes, clearer erroneous-trade rules, the Limit Up-Limit Down bands and S&P 500-based market-wide halts: the structure that governs a fast US market today.