What seems to have initiated the Flash Crash was a culmination of things. As the other exchanges discovered the bids in NYSE, they re-routed and started to match up. The bid orders from the NYSE were at a level that was slightly higher than the lowest ask price on other exchanges. As queue lines built up at the NYSE, orders coming from BATS started to pick up thanks to the algo’s and the bid queue at NYSE was filled in rapid order from BATS.
This means the NYSE queue order coming through to be matched with others from opposing exchanges was delayed in disseminating its quotes. Nanex reported “It appears that the event that sparked the rapid sell off at 14:42:44:075 was an immediate sale of approximately $125 million worth of June 2010 CME eMini futures contracts followed 25ms later by the immediate sale of over $100 million worth of the top ETF's such as SPY, DIA, QQQQ, IVV, IWM, SDS, XLE, and EEM. Both the eMini and ETF sales were sudden and executed at prevailing bid prices. The orders appeared to hit the bids”. What we have here is a saturation of orders from the algo’s on the NYSE, NYSE (Arca) and the NASDAQ. Usually quote traffic will coincide with heavy sales, but this situation described by the Nanex shows that the quote traffic surged before the trades that day. This surge in traffic caused delays to quotes being updated to reflect the newest market valuations. “We found that stocks beginning with the letters A through M (except for I and J) were delayed up to 24 seconds, while stocks beginning with I, J, and N through Z were delayed up to approximately 5 seconds”.
What is shocking is that this trade behavior was exhibited 8 days before the crash, on April 28th, 2010. This is incredible within itself that this information is able to be found. The data we’re covering here streams within 2 seconds. Think about it: Within one second, $125Mn Jun 10 CME eMini’s were sold. This was at 14:42:44:075. At 14:42:44:100 another $100Mn of ETF's such as SPY, DIA, QQQQ, IVV, IWM, SDS, XLE, and EEM were sold. These we sudden and the orders cleared the bid side of the book. This was focused on the NYSE, NYSE (ARCA) and NASDAQ. What ensued was a mispricing in the market. This order side “saturated” the trade funnels causing delays in matching buyers and sellers and the ability of the exchanges to update prices accurately. What ensued was this, leaving a ripe opportunity for the small group that could have planned this to jump in and pick up stocks like Philip Morris at $2.00 or Accenture at $0.01. 