On May 6, 2010, the Dow Jones Industrial Average dropped 998.50 points between 2:40 p.m. and 2:47 p.m. and almost immediately recovered 543 points by 3 p.m. Based on my review of many newspaper articles, my experience in the field of securities regulation, the SEC-CFTC preliminary report and congressional testimony,1 a study by Professors James J. Angel, Lawrence E. Harris and Chester S. Spatt,2 as well as conversations with traders and brokers, I have drawn a tentative conclusion on what happened. The confluence of several factors resulted in the May 6 flash crash: changes in the market; development of institutional traders who seek profits from changes in prices regardless of the underlying value of the securities being traded; and market events of May 6.
SEC Chairwoman Mary L. Schapiro has testified that two measures being taken will address the factors that caused the flash crash. These are the November 2010 compliance date for the SEC’s short sale rule and the rule proposals of almost all the securities exchanges that will cause a five-minute halt in trading a security in the S&P 500 Stock Index if the price of that security changed more than 10 percent in any five-minute period occurring 15 minutes after the markets open and before the last 15 minutes that the markets are open.
