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Flash Crash

A flash crash is a sudden, severe drop in the price of financial assets within a very short time frame, often followed by a quick recovery. Flash crashes are typically caused by automated trading algorithms, high-frequency trading, and a lack of liquidity, which can lead to rapid price declines and extreme market volatility. These events can disrupt markets and erode investor confidence, prompting regulatory scrutiny and changes to market mechanisms to prevent future occurrences.

Example

On May 6, 2010, the U.S. stock market experienced a flash crash where the Dow Jones Industrial Average plunged nearly 1,000 points within minutes before rebounding quickly. The incident was linked to automated trading algorithms and a lack of liquidity.

Key points

• Sudden, rapid decline in asset prices followed by a swift recovery.

• Often caused by high-frequency trading and automated algorithms.

• Can disrupt markets and trigger regulatory actions.

Quick Answers to Curious Questions

Flash crashes are primarily triggered by algorithmic trading, market illiquidity, and rapid sell-offs that cascade into further declines due to automated responses.

Regulators implement circuit breakers, trading halts, and scrutiny of high-frequency trading practices to mitigate the impact of flash crashes.

Flash crashes can result in significant losses for investors caught in the sudden downturn, affecting market confidence and investment strategies.