The actual crisis struck in the three minutes between 2:41 p.m. and 2:44 p.m., when the market fell another 5 percent to 6 percent. Hunsader’s analysis suggests this plunge was caused by high-frequency traders. They typically act as liquidity providers, standing ready to buy and sell at certain price levels. But the day’s volatility prompted them to dump their holdings to avoid losses. In a matter of minutes, they actively sold an accumulated stock of about 2,000 E-mini contracts. It was this selling, not Waddell & Reed’s passive orders, that caused liquidity to disappear.
There is nothing blameworthy about what the high-frequency traders did. Market makers aren’t charities, and their algorithms were only saving their skins amidst extreme market turbulence. Their actions do, however, rather undermine the common argument that high-frequency traders bring wonderful benefits to the market through the liquidity they provide. That liquidity, as many have pointed out, has a rather ghostly quality and tends to vanish when needed most.„
Mark Buchanan in Flash-Crash Story Looks More Like a Fairy Tale - Bloomberg