Flash crash

The mechanism is a feedback loop in the order book rather than a revision of what something is worth. As volatility spikes, resting interest is cancelled or widened away, so the book thins. Each incoming order then travels further through the remaining levels to find a counterparty, which moves the price more, which triggers stop orders that become market orders, which sends more quantity into an even thinner book. The recovery that usually follows within minutes is the mirror: liquidity returns once the cascade exhausts itself, and much of the move is retraced.

The most cited episodes are an equity market event in the United States and an overnight fall in sterling during thin Asian hours, and the common features are instructive: both happened when depth was unusually low, both moved further than any contemporaneous news explained, and both partially reversed before most participants had read about them. Thin hours, the minutes around a scheduled release and the gap between sessions are where the conditions gather.

The practical consequence is about order behaviour. A stop order becomes a market order when its level is touched, so it fixes the moment of execution and not the price, and in a cascade the distance between the two can be large. Exchanges sometimes cancel prints made during such an event under published rules, but an over the counter position is settled against the price at which it actually dealt. A guaranteed stop is the industry's term for an order that a provider undertakes to fill at its stated level regardless of the gap, usually for a fee; that is a description of a general market product and not a statement about anything offered here.