Various technical issues may have made things worse, but the central cause of the flash crash was due to lack of regulator and/or procedures for the now distributed markets (exchanges, ecns, dark-pools, etc...) on a market imbalance.
What started the whole thing was a selloff of a large quantity of e-mini futures, which caused a broad run on the market. This is a feature, not a bug. The thundering herd responded, as normal, by starting their own sell-off Before the decentralized markets, when there was a market imbalance (all buyers or all sellers), the "specialist" or "market maker" would halt trading in a symbol, and work with the buyers/sellers to determine a new price and re-open with the new price. The problem is without coordination, when the NYSE/Nasdaq market makers halted trading, the distributed exchanges weren't halted. Since the market makers in those exchanges are required to always have quotes, they put out "stub" quotes of 0.01/$10000.00. Since there weren't valid quotes on the regular exchanges and because of RegNMS, those stub quotes got disseminated as BBO. This was a cosmetic issue and didn't effect trading. Who really got screwed were people that had a stop order on their stocks and didn't realize there were no guarantees of trading through that price. For example, if you bought a stock at $100, and put a stop order to sell at $90, and there was a market imbalance, the price could trade discontinuously. For example the last valid quote could have been at $95.90, then halted, then re-opened at $82.50. The stop order would sell immediately at $82.50, not the $90 people thought. Then the stock could recover and be trading at $95.05 and you could really feel you were screwed. But that's how it is supposed to work. ---- Matthew Huff | 1 Manhattanville Rd Director of Operations | Purchase, NY 10577 OTA Management LLC | Phone: 914-460-4039 aim: matthewbhuff | Fax: 914-694-5669 -----Original Message----- From: NANOG [mailto:nanog-boun...@nanog.org] On Behalf Of joel jaeggli Sent: Thursday, August 6, 2015 1:31 PM To: Christopher Morrow <morrowc.li...@gmail.com>; John Kristoff <j...@cymru.com> Cc: nanog list <nanog@nanog.org> Subject: Re: Did *bufferbloat* cause the 2010 flashcrash? On 8/6/15 9:58 AM, Christopher Morrow wrote: > On Thu, Aug 6, 2015 at 12:51 PM, John Kristoff <j...@cymru.com> wrote: >> It would seem surprising that delays in general due to long queues >> would not have been noticed before, since or would have caused other >> more far reaching problems. > > bufferbloat is the boogieman... of late. I think that's foolish :( > I think this comment from jtk is really on point though! 'why only > then?' that sure seems convenient, eh? The queuing like the RBC dudes were doing was in order transmission not on the wire. given wires of various lengths having the request arrive on different exchanges at different times based on distance was considered unedesirable (by people loooking to reduce the opportunity for arbitrage on latency). I have have minimal experience with trading platforms but what switch vendors were selling us as a latency sensitive customer (and HFT shops at time) were broadcom or fulcrum asics which by virtue of being cut-through are essentially minimally buffered.
