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How one automated trade led to stock market flash crash
The mutual fund company, according to the report, used a computer-driven automated strategy to sell E-Minis at any cost, as fast as possible.
In the past, the company had made bets as large in the E-Mini market, but had controlled for price and time, according to the report. Those trades took more than five hours to execute and caused no problems.
But this time, the program completed all its trades in 20 minutes.
The report said that many of the sell orders were bought by high-frequency traders, hedge funds and other firms that seek to make profits by exploiting millisecond-long changes in prices. But just as soon as they bought the E-Minis, they turned around and tried to sell them.
Regulators called the cycle of selling a "hot potato" effect. With many more sellers than buyers, the price of the E-Mini rapidly fell.
The effect was quickly mirrored in the actual stock market. Spotting the upheaval in the E-Mini market, financial firms that usually are active buyers and sellers of shares withdrew or severely limited their activities until they figured out what was going on.
With the stock market already sagging, there were far more sellers than buyers for many stocks. With little to no liquidity, trades in some stocks occurred at unfathomable prices - under a penny or at $100,000.
By 2:47 p.m., the Dow had fallen 600 points and was down nearly 1,000 for the day.
Both the E-Mini market and the stock market rebounded, after a mechanism designed to pause trading in E-Minis during extreme volatility triggered.
Soon after, the number of buyers and sellers in the market came back into balance, and markets recovered their losses.