The flash crash is caused by a lack of bid in the order stack. The price is supported by a narrow band of small orders. Once these orders have been satisfied, there are no more orders of any significant size, and the price plunges.
One or more large orders placed in such an environment will cause a collapse in the price, and we have the initial flash.
Since the crash is caused by a small number of sellers, they realize the damage they have just done to the price, and they remove their orders so as not to cause more damage.
The large sellers are gone, and the buyers return, sometimes helped by one or more large participant intent on repairing the damage.
What follows is a period of uneasy calm. Everyone knows that the bid is thin and brittle. However, there is a conspiracy of silence. As long as everyone treads lightly, the hope is that things will return to normal.
This is the period when optimists continue buying while the realists carefully unwind their long positions. There is a quiet panic among the ones who knows the significance of the flash crash.
As the awareness of the true state of the market spreads, the number of people who want to exit their long positions increase, and a real and sustained crash ensues.
 |
| Reflection in a soap bubble |
By Brocken Inaglory. The image was edited by user:Alvesgaspar - Own work, CC BY-SA 3.0, Link
No comments:
Post a Comment