A flash crash is a sudden drop in stock prices followed by an equally sudden rebound, with prices returning to a level close to equilibrium. A flash crash is therefore an accelerated version of a stock market crash.
The first flash crash of its kind, dubbed « Flash Crash, » occurred on May 6, 2010, on the US market. On that day, in a market made volatile by the critical situation in Greece, US indices (S&P500, Dow Jones) and other derivatives (E-mini futures contracts on the S&P500 and index ETFs) plunged by around 10% in just a few minutes, before recovering a few minutes later. In the meantime, $1 trillion in market capitalization disappeared and then reappeared without any fundamental explanation.
On October 5, 2012, the Nifty, the Bombay Stock Exchange’s flagship index representing India’s largest companies, plunged 15% in a matter of minutes before recovering, causing $60 billion in market capitalization to disappear and then reappear.
A replica of the Flash Crash occurred on August 24, 2015, on the US market. On that day, at the opening of the market, the S&P 500 index fell nearly 8% in a matter of minutes, triggering circuit breakers on 1,278 stocks. As with the flash crash of May 6, 2010, the market recovered a few minutes later.
On October 7, 2016, it was the pound sterling’s turn to suffer a flash crash, falling 12% against the US dollar in just two minutes before quickly rebounding within 20 minutes.
There have been numerous flash crashes since 2010, affecting many assets, the most recent being the mini flash crash on Ethereum, the second largest cryptocurrency after Bitcoin. On June 22, 2017, ether fell from $319 to 10 cents on the GDAX exchange, a drop of 99.9% in just a few seconds, before returning to equilibrium a few seconds later.
Although this phenomenon has little impact on investors with a long-term investment horizon (as the market quickly returns to equilibrium), it can be very restrictive for active investors with stop-loss orders in the order book, as these orders can be triggered at any time and well below the initially chosen threshold.
To go further:
Analysis of the flash crash that hit the pound sterling (Floris Laly, BSI)
Possible causes of the flash crash on the pound sterling (Floris Laly, L’AGEFI)
[1]A mini flash crash is an accelerated version of a flash crash, with prices falling and recovering in just a few seconds.
