The Panic: Markets and the Flash Crash

On Thursday afternoon, the American stock market fell almost a thousand points in a matter of minutes, and the fall was the fastest in the history of the Dow. The biggest intraday drop ever recorded erased about a trillion dollars of value before most of it returned by the close, and the panic was over almost as quickly as it had begun. The Panic is the May 2010 story, and the story is the lesson: the market had become a computer network, and the network had a glitch.

The Panic is the subject of this article: what happened to the markets on the afternoon of May 6, how the machines moved the money, and how the regulators promised to review the rules. The day began as an ordinary Thursday and ended as a footnote in the history books, and the footnote was the fear. This is the story of the panic, and the story is about the moment the market stopped being a place where people traded and became a network where machines talked to machines.

1. The Drop

The drop was the story of the day, and the story was the numbers. The Dow Jones Industrial Average fell 998.5 points within minutes in the afternoon, a fall of about 9 percent, the biggest intraday point drop in the history of the market. The S&P 500 fell more than 8 percent in the same minutes, and about a trillion dollars of market value evaporated, and the evaporation was the headline.

The drop was also the mystery of the day. The market had been drifting lower all afternoon, and the drift was the worry, and then the bottom fell out without a single piece of news to explain it. The drop was the event, and the event was the question: what had just happened, and who had done it? By the evening, the day had a name, and the name was the flash crash. The exchanges issued statements within hours, and the statements were the reassurance, and the reassurance was the beginning of the search for an answer that no one had.

2. The Afternoon

The afternoon was the sequence, and the sequence was the shock. The selling began in the early afternoon, and the selling was the pressure, and the pressure became the plunge: in a matter of minutes, the selling turned into a waterfall. The buyers disappeared, the liquidity vanished, and the market was left with a vacuum where the orders should have been. The afternoon was the panic, and the panic was the pause.

The afternoon was also the halts. The trading halts were triggered as the plunge accelerated, the pauses that were designed to slow the market down, and the pauses were the only thing that slowed it. The exchanges stopped the trading in stock after stock, and the stops were the shock absorbers, and the shock absorbers were the difference between the panic and the collapse. The New York Stock Exchange slowed its own systems under the weight of the orders, and the slowing was the silence, and the silence was the pause that kept the machines from running the market into the ground. The afternoon was the shortest and the longest in the history of the market, and the length was the fear.

3. The Machines

The machines were the suspects, and the suspects were the story. The high-frequency traders were running the market, the algorithms were buying and selling in fractions of a second, and the programs were pulling their liquidity out of the market as the plunge began. The machines did not panic, and the not panicking was the problem: the machines did not step in to buy, the machines stepped aside. The machines were the market, and the market was the machine.

The machines were also the mystery. The quote-stuffing, the spoofing, the correlated algorithms that all did the same thing at the same moment, the computer programs that spoke to each other in a language no human could follow, these were the suspects, and the suspects were the story. The machines were blamed before the investigation, and the blaming was the instinct, and the instinct was the fear. The machines were the new market, and the new market was the unknown.

4. The Stocks

The stocks were the absurdity, and the absurdity was the proof. The shares of the consulting giant Accenture fell to a penny in the middle of the plunge, and the penny was the price for a company that had been worth about forty dollars an hour earlier. The shares of the consumer giant Procter & Gamble fell more than a third in a single minute, and the fall was the panic made visible. The shares of the bank Citigroup traded at prices that had no relationship to the value of the bank, and the relationship was the casualty, and the casualty was the day. The prices made no sense, and the senselessness was the signal.

The stocks were also the recovery. The absurd prices snapped back almost as fast as they had appeared, the penny became forty dollars again, and the falls became the footnote. The stocks that had plunged were the stocks that recovered, and the recovery was the strangeness of the day: the market had gone mad, and the madness had lasted minutes. The stocks were the evidence, and the evidence was the question.

5. The Regulators

The regulators were the response, and the response was the promise. The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were investigating, and the investigating was the reassurance, and the reassurance was the thinness of the comfort. The regulators promised to review the circuit breakers and the market structure, and the review was the beginning, and the beginning was the uncertainty.

The regulators were also the admission. The watchdogs of the market were saying they did not know what had happened, and the not knowing was the confession, and the confession was the fear. The rules that had been written for a market of people were being tested by a market of machines, and the test was the question. The regulators were the last line, and the last line was the hope.

6. The Network

The network was the truth of the day, and the truth was the technology. The market had become a computer network, the exchanges were the nodes, the algorithms were the messages, and the network had a glitch. The glitch was not a bug in a single program, the glitch was the system itself, the way the machines talked to each other and decided together, and the deciding together was the danger. The market was the network, and the network was the machine.

The network was also the new reality. The floor traders and the paper tickets were the past, and the past was the nostalgia, and the present was the fiber optics and the data centers and the algorithms that never slept. The data centers sat in the suburbs of New York and Chicago, miles from the trading floors they had replaced, and the distance was the new geography of the market. The network could move a trillion dollars in minutes, and the moving was the power, and the power was the question. The network was the market of the future, and the future had arrived on May 6.

7. The Recovery

The recovery was the surprise, and the surprise was the lesson. By the close, the Dow had recovered most of the plunge, and the recovery was the return: the market closed down about 350 points, a fall of roughly 3 percent, a bad day and not a catastrophe. The trillion dollars that had evaporated in the afternoon returned within minutes, and the returning was the strangeness. The market had fallen off a cliff and climbed back before the closing bell, and the climbing was the mystery.

The recovery was also the question. The market had recovered, and the recovery did not explain the fall, and the fall was the fear that remained. The investors who had sold in the panic had sold for nothing, and the nothing was the cost, and the cost was the lesson about the machines. The regulators promised a report, and the report was the homework, and the homework was the first step toward understanding what the machines had done. The recovery was the relief, and the relief was the temporary, and the temporary was the truth.

8. The Lesson

The lesson of the panic was about the machines, and the machines were the fear. The market had been built for speed, and the speed was the design, and the design had a flaw: the machines do not know what fear is, and the not knowing is the danger. The human traders had panicked and the machines had calculated, and the calculating was the coldness, and the coldness was the crash. The market needed the fear, the human instinct that said stop, and the instinct was missing from the machine.

The lesson was also about the future. The regulators would study the day, the exchanges would review the rules, and the market would go on, and the going on was the certainty. But the question of the machines, the liquidity, the speed, and the trust, would not be answered on May 6, and the unanswered was the story. The Panic is the May 2010 story, and the story is the lesson: the market had become a computer network, and the network had a glitch, and the glitch was the question that the machines could not answer.

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