As somebody who used to work in Program Trading, I suspect that unanticipated side effects of Reg NMS amplified already substantial market movements. The regulation, designed to prevent trade-through, has the effect of creating a submarket for those interested in fast execution at any cost. This submarket is very light on liquidity.
It seems conceivable that everything functioned exactly as it was designed.<p>As the Yen spiked, holders of much borrowed USD needed to liquidate and pay back their borrowings, and program selling snowballed across very very thin markets.<p>Several 'liquidity providers' including TradeBot withdrew liquidity in the plunge, perhaps leading to the 0.00 and 0.01 bids that applied to quite a few stocks.<p>We have a very poorly regulated system, with few safeguards for regular investors. Sure, the spreads are generally tighter than the old days of floor trading, but the secret dark markets and computer trading can be turned on and off at will, leading to the kind of thing we saw Thursday.
Someone called it a "display of digital nukes". Here is a quick chart I did on spot market EURJPY which is a proxy barometer for equity markets (it is corelated, like copper price is for world economic growth): <a href="http://i.imgur.com/E6MK2.png" rel="nofollow">http://i.imgur.com/E6MK2.png</a> massive inverse cup and handle on a daily chart. So it is by TA, straight from a textbook. Movement was rather dramatic though, and still more to come after a bit of consolidation (from a week to about end of the summer at most).
Some say don't rule out sabotage <a href="http://thehill.com/homenews/administration/96713-white-house-doesnt-rule-out-sabotage-in-market-fluctuation" rel="nofollow">http://thehill.com/homenews/administration/96713-white-house...</a> The article doesn't provide a quote using that word, but this isn't the kind of media outlet that would typically make up something so inflamatory.
My naive guess is automatic stops. If you enter a position electronically, you set stop losses for the low barrier. If it falls below that, the stops will trigger, selling off the stock, lowering the price, and causing other stocks to do the same creating a domino effect.
Yeah. It was interesting. It's still unknown. Most of the trades canceled. Some people made big bucks / losses (up to 60%).<p>Can we please move along?