1. 2010 FLASH
CRASH
ROSS APTED

2. WHAT HAPPENED
At approximately 2:45 on 6th May 2010 Prices on the United
States stock market fell sharply only to recover minutes later.
The Dow Jones dropped 600 points during the crash adding
to 300 point drop that day(due to Greek debt crisis).
Most of the 600 point drop was recovered within tens of
minutes.
(The staffs of the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission. )
Dow Jones – Important Index of the stock of 30 large
companies that are representative of the
United states economy. Represents state of
market.

3. THE STOCK MARKET
Charging Bull statue near Wall Street in New York symbolizes a Bull market - where
prices in the market are on a upward trend.

4. Stock Market - The market for the trading and issuing
shares (company stocks) done
via stock exchanges.
Stock Exchange - Provides a services that allow
securities (stocks, bonds etc.) and
financial instruments to be traded.
Ensures fair and orderly trading.
Effectively disseminate data on the
prices of securities.
Stock exchange simulator:
http://www.howthemarketworks.com/

5. STOCK EXCHANGE
Major financial institutions situated around world around
world. UK has London Stock Exchange.
core roles:
1) Raise capitol for new firms by shelling a share
(stocks) in the company. Primary Market
2)Prove a platform for people to sell and buy shares
(stocks).Secondary Market
Stock – A unit of ownership in a corporation entitling you to
part of the assents and profits of the corporation.

6. Business raises
money by selling Buys shares
shares in the on the second
company hand market Stock
Business
Exchange
Business pays Sells shares
shareholders on the second
dividend Member hand market
of public
Key
Cash flow
Dividend – Payment of a proportion of the
companies earning to the share
holders. Proportion Decided by the
board of directors. (Cash amount per
share)

7. FINANCIAL
INSTRUMENTS
A document representing a legal binding agreement involving
Monterey value.
S&P 500 – A market weighted Index based on the stock
prices of 500 American companies.
Representative of industries in the U.S. economy
thus a good indicator of the U.S. economic market.
S&P 500 contracts – Are future contracts that are traded
as a bet on where the S&P 500 index
will be in the future. The value of one of
these contracts is $250 multiplied by the
value of the S&P 500 index.

8. E-MINI S&P
AND EXAMPLE
E-MINI S&P – A smaller more affordable version of the
S&P 500 contract. The value of one of these
contracts is $50 multiplied by the value of the
S&P 500 index.
Example
Say that E-MINI S&P is trading at 1000(S&P 500 index at 100
points). Then the trader controls $50,000 of the S&P 500
index stocks. As the index increases or decrease the
contract can be sold for more or less money.

9. HIGH-FREQUENCY
TRADING
Powerful computerized trading tool that executes a large
number of trades at high speeds.
Algorithms used to used to monitor multiple market factors
orders are executed based on market state.
Make pennies on each trade that accumulate. The faster the
trader the more profit is made.
Provide liquidity to the market.
Liquidity – The amount a security can be traded without a
change in there price. A liquid security is one
that can be bought and sold with ease.

10. INVESTIGATING THE CRASH
New York stock exchange 1979 - Santi Visalli

11. THE CRASH
Caused prices of most of the 8000 securities on the market
decline rapidly
Prices fell up to 15% in some cases.
20,000 trades took place at the time of the crash were price
60% away from the pre-crash values.
Some trades occurred as high as $100,000 or as low as less
than a penny.
Prices retuned to pre-crash levels moments later.

12. DOW JONES INDEX ON
THE DAY OF THE CRASH

13. CFTC AND SEC
REPORT
Official report on the crash by the U.S. government.
(The staffs of the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission. )
Event 1: Unsettled market
Safe premiums(safe assents e.g. gold) prices increased to
protected against the Greek debt crisis.
Euro declined rapidly the Dollar and Yen.
Market volatility increased and Liquidity Replenishment Points
triggered.
Liquidity Replenishment Points - triggered by individual
stocks. Takes triggering
stocks of the market for a
time to decrease the
volatility.

14. liquidity of the E-mini future contracts had by 55% that
morning.
Volatile and illiquid market.
Event 2: Sell Algorithm
A large trader executed a sell Program to sell 75,000 E-mini
contracts. Done to hedge an existing position.
Sell algorithms normally take into account price, time and
trading volume. This algorithm was set to only car about
trading volume.
Sell rate set at “9% of the trading volume calculated over the
previous minute”
Stock was sold 15 time faster than a previous trade of that
size.
Flood of E-mini deceasing liquidity

15. Event 3: High-frequency trading
Initial contrast were absorbed by fundamental buys in the
future market. They then left the market.
High-frequency traders began to buy large amount E-mini
contacts.
Price of E-mini contracts dropped by 3%
The High-frequency traders due to their nature did not hold
on to there position stated selling to each other. Report
states that a “hot potato” situation was created sold back
and forth to each other. Sell volume increased algorithm
speed
High-frequency traders dropped out of market.
Liquidity further decreased and price of E-mini dropped 6%

16. No liquidity in E-mini market.
Stop-logic on Chicago Mercantile Exchange trigged in order
to prevent a future price declined.
E-mini market paused. Sell side pressure was alleviated.
Market recovered
Flash crash was over.
Outcome
Circuit breakers were installed on the New York Stock
Exchange S&P stock that are trigged when the stocks rise of
fall by 10% in a 5 minute period.

17. ACADEMIC
LITERATURE
THE MICROSTRUCTURE OF THE ‘FLASH CRASH’
(Easley, Lopez de Prado, & O'Hara, 2010)
Provides supporting evidence that illiquidity caused the
crash as detailed in the CFTC report.
Key points:
Order flow toxicity an its role in the crash.
Order flow toxicity – likelihood that “informed traders”
(hedge funds, large human controlled traders) incorrectly
select “uniformed traders”(HFT).
(Easley, Lopez de Prado, & O'Hara, Flow Toxicity and Liquidity in a High Frequency World, 2012)

18. Illiquidity is unknowingly created.
Use the VPIN flow Toxicity metric which provides measure of
the liquidly that is being provided.
When flow to toxic market maker forced out of market, feed
back increase effect and liquidity is lost.
(Easley, Lopez de Prado,
& O'Hara, 2010)

19. Solution:
“The creation of an exchange-traded „VPIN contract”
Give market makers a means of measuring flow toxicity
A way for HFT to hedge against being adversely selected,
they could stay in the market an keep providing liquidity.
CME Report
The 75,000 E-mini trade was not the cause, it was within
regulation.
High-frequency traders were not the cause, they help market
recover.
That no errors or misconduct was found.
(CME Group, 2010)

20. REFERENCES
CME Group. (2010). What Happened on May 6th? Chicago: CME Group.
Easley, D., Lopez de Prado, M. M., & O'Hara, M. (2012). Flow Toxicity and
Liquidity in a High Frequency World. Review of Financial Studies , 1457-
1493.
Easley, D., Lopez de Prado, M. M., & O'Hara, M. (2010). The
Microstructure of the „Flash Crash‟: Flow Toxicity, Liquidity Crashes and
the Probability of Informed Trading. he Journal of Portfolio Management
, 118-128.
The staffs of the U.S. Commodity Futures Trading Commission and the
U.S. Securities and Exchange Commission. . FINDINGS REGARDING
THE MARKET EVENTS OF MAY 6, 2010 . Washington, D.C : U.S.
Commodity Futures Trading Commission and the U.S. Securities and
Exchange Commission.