The Flash Crash
http://www.nytimes.com/2010/10/02/business/02flash.html?_r=1&scp=1&sq=flash+crash&st=nyt
On May 6th, 2010, financial markets experienced a sudden crash and then quick recovery when high speed trading algorithms caused an excess of sell orders in a major index that ended up driving its price and other markets down and leading the Dow Jones industrial average to drop almost 1,000 points in a day before recovering a majority of the losses before close. The volume of sales originated from a single large trade executed unusually quickly, which caused high frequency trading algorithms to buy up the excess of shares, then quickly sell as the excess of sales continued, leading to an explosion of selling and a crash in the value of the index.
The sudden market crash was caused by an excess of sales that created a cascade effect. High frequency trading algorithms initially bought shares as the unusually large order was placed, but then the excess volume exhausted all buyers, and as the sell orders continued to be issued by the first firm, their sales served as a signal to the firms that initially bought their shares, causing the previous buyers to sell their shares in response and a cascade effect to occur, depressing the price of the stock because the excess of sellers gave new buyers an advantage in negotiating prices. The crash then spread to other markets due to the inter-connectivity of markets and how indexes and funds are valued, and an overall drop in confidence that served as a signal for algorithms to shut down or reduce trading, reducing liquidity and exacerbating the other problems.
-batman