If only all multithreaded programs behaved that well.
[edit: added parenthetical "(at the time)", thanks chr15.]
Report of SEC finding [PDF]: http://www.sec.gov/news/studies/2010/marketevents-report.pdf
75,000 e-mini contracts is not an astronomical amount. Orders of this size are not uncommon.
To really understand what happened one must answer the question: what are the market conditions we have created such that a normal sized order can cause such a dislocation?
A lot of this has to do with the practices of the HFT 'liquidity providers.' This is a complex topic, but the flash crash demonstrated what a lot of people have been saying for years: volume != liquidity, the HFT shops generate volume, not liquidity and engage in some practices (quote-stuffing, sub-pennying etc) which serve to systemically destabilize the markets. (and overload the market infrastructure)
http://www.zerohedge.com/article/refuting-secs-lies-core-fla...
The blog here is zerohedge, but the data is from nanex.
"Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net... "
While buying only 200 additional contracts...HFT algo's pinging the market with orders never placed :D
A) You can't ping the market with "orders never placed." You can place orders which may or may not be filled. In this case, they were filled.
B) They are talking about trade volume, not order volume. Further, "200 additional contracts net". Thus means the HFTs immediately purchased 27,000 contracts and later resold 26,800 of them to someone else. Lastly, your laptop can probably process 27,000 trades in less than one second.
This is why the market tends to correct errors quickly. Fixing things == making money, breaking things == losing money.
...stop-loss orders to lock in profits...
Go learn what a stop loss order is. I blame the retail investor for placing an order he doesn't understand.
So all those people that wanted to protect their hard earned investments (incl. 401k's) at a reasonable level "broke" things and HFT "corrected" them!? In my world that's actually called stealing.
If you placed stop limit orders, you didn't lose a bundle and you also didn't harm the market very much. If you placed a stop limit on Accenture at 40, you lost $1/share. That's a hit, but not a ridiculous one. That's the penalty for telling the market that Accenture should be priced at $40 when it should really be priced at $41.
A lot of retail investors actually did place stop loss orders. That's why Accenture traded at $0.01 (note: those trades were broken). Bargain seeking HFT's and daytraders bought at $0.01, sold at $0.05, and quickly pushed the price of Accenture back up to $40.0 or so.
The market will hurt you if you give it bad information. The worse the information, the more you lose. If you don't understand this you should not trade.
We are not slaves of the Market, we shouldn't give it any information, it should give us information. That's the utility of the market you know.
When the game becomes "who has the fastest program to rip off this stupid risk-averse 401k guy trying to make few basis points above CD" Mr. Market totally defied it's purpose. That's when we should call the butcher and rip some tentacles off.
When we're buying or selling, we have to give the market information as to our buy or sell price. We have to give information to the market in order to participate in it. The information coming out of the market, after all, is merely the aggregation of the information we put into it.
If the information you give to the market is "sell at any price" when what you actually meant was "sell at $40 or more", you messed up. Don't blame the market when you give it the wrong information and it takes advantage of your mistake; if you offer a ridiculous bargain, the job of the market is to allow others a chance to jump at that bargain, which is exactly what they did.
First of all, very elitist from you (even though I suppose you're one of them too).
And second, actually not true. As I said, no (or almost no if you like) retail investor is stupid. All they wanted to do is to protect their positions at a reasonable level depending on variety of factors like entry price, relation of the price to some moving average etc. etc. So calling that stupid and being equal to "offering a bargain" or giving Mr. Market "wrong information" is itself stupid at best.
I believe some retail investors attempted to "protect their positions at a reasonable level" by using the wrong tool, namely, a "stop loss" order (which provides a sale at any price) rather than, say, a "stop limit" order (which provides a sale with a price floor.) This was a bad decision on their part, which in the case of the "flash crash" led to them offering their stocks at bargain prices (like Accenture for a penny.) Simply using the right tool would have protected these investors from taking such severe portfolio hits.
Hopefully, some good came out of this and people became more careful.
A stock market with round the clock, instantaneous transactions is one of the most efficient markets that exist. Instability would suggest that it frequently allows for inefficient outcomes. A stock market's prices are determined exactly by buyer demand and seller supply. It corrects itself in the event of freak transactions (like the flash crash) and if it doesn't correct itself, that means the supply and demand have changed and the price of stocks nearly instantly reflect those changes.