On the morning of May 6, 2010, the financial world had its eyes on Greece. Trouble was brewing in the land of the Acropolis amid fears that a national debt crisis was at hand, one that had the power to spread to the European Union and beyond.
To stabilize the situation and to allay the concerns of outside observers, in particular creditors, Greece’s government was contemplating austerity measures. Markets around the globe were waiting anxiously for the fix that would make it all go away.
The people of Greece, though, wanted none of it. And so, armed with their anger and led into battle by the omnipresent Kanellos the Greek Protest Dog, they took to the streets. Chaos ensued. New worries spawned.
What did the angst in Athens mean for the rest of us? Would Greece’s debt woes really spread? Could contagion, the buzzword of the times, be looming? In modern finance, a problem that starts one day as someone else’s halfway around the world can be yours the next day.
This thought occupied the smartest minds on Wall Street and on trading desks around the globe on May 6. Stocks in the U.S. were briefly higher that morning, but uncertainty was evident from the outset. The market began to weaken, and it continued falling steadily. By the afternoon, it was obvious that the jitters were too much, and sellers would win the day. The only question was how bad it would be.
Just after 2 p.m. ET, the Dow Jones Industrial Average was showing a loss of 170 points — not good but far from a disaster. A half-hour later, it was down almost 300. Meanwhile, news outlets dutifully covered Greece. Greece was the cause. Commentators discussed contagion at length. Kanellos roamed the streets with abandon.
Then something happened. The Dow and other averages began to drop and quickly. For the industrial average, it wasn’t by 25 points or 50 or even 100. It was a free fall. Head-scratching in New York, then panic. We had a problem all right, and it wasn’t a Hellenic one: It was the flash crash.
By about 2:45, the Dow was a whopping 665 points below its prior day’s close, and the selloff wasn’t finished. Seconds later, the Dow was more than 800 points down. A minute after that, the loss was a staggering 998.50 points — more than 9% of the index’s total value and the single-largest point decline in the 104 years of its existence. Shares were cratering across the board. Apple was plunging. Some stocks, including Accenture’s, registered as selling for 1 cent.
Suddenly, a reversal began, and the Dow erased more than 300 points of its deficit in roughly 60 seconds. By 3 p.m., the shocking damage from the previous 30 minutes had largely been undone. At the end of it all, the industrials finished lower by about 340 points, meaning they recovered 600 points in an hour. (The Wall Street Journal offered an outstanding account of the events of that afternoon, along with an interactive graphic that formed the basis for this retelling and that provides much greater detail. See “Legacy of the ‘Flash Crash’: Enduring Worries of Repeat.”)
What on earth happened? Speculation initially centered on the possibility that a mistyped trade entry may have sparked uncontrolled selling by computer programs, but that theory was discounted quickly.
After months of careful review, regulators assigned considerable blame for the selloff to the trading of one firm, which they didn’t name but which is believed to be Waddell & Reed. However, subsequent private analyses have cast doubts on that conclusion.
In other words, the right answer might never be found, or at least not agreed upon. What isn’t up for debate is that orders for thousands of shares traded in the flash crash were canceled, new rules to prevent outsized and unchecked moves were enacted, regular investors were given another reason to wonder if they could trust the stock market, and the events of that day will be written about in financial history books.
Could it happen again? Never rule anything out. On Wall Street, as with everything else, history has a way of repeating itself.