Aldrich, Eric M. and Grundfest, Joseph and Laughlin, Gregory, The Flash Crash: A New Deconstruction (January 25, 2016). Available at SSRN: http://ssrn.com/abstract=2721922 or http://dx.doi.org/10.2139/ssrn.2721922

“On May 6, 2010, in the span of a mere four and half minutes, the Dow Jones Industrial Average lost approximately 1,000 points. In the following fifteen minutes it recovered essentially all of its losses. This “Flash Crash” occurred in the absence of fundamental news that could explain the observed price pattern and is generally viewed as the result of endogenous factors related to the complexity of modern equity market trading. We present the first analysis of the entire order book at millisecond granularity, and not just of executed transactions, in an effort to explore the causes of the Flash Crash. We also examine information flows as reflected in a variety of data feeds provided to market participants during the Flash Crash. While assertions relating to causation of the Flash Crash must be accompanied by significant disclaimers, we suggest that it is highly unlikely that, as alleged by the United States Government, Navinder Sarao’s spoofing orders, even if illegal, could have caused the Flash Crash, or that the crash was a foreseeable consequence of his spoofing activity. Instead, we find that the explanation offered by the joint CFTC-SEC Staff Report, which relies on prevailing market conditions combined with the introduction of a large equity sell order implemented in a particularly dislocating manner, is consistent with the data. We offer a simulation model that formalizes the process by which large sell orders of the sort observed in the CFTC-SEC Staff Report, combined with prevailing market conditions, could generate a Flash Crash in the absence of fundamental information. Our research also documents the emergence of heretofore unobserved anomalies in market data feeds that correlate very closely with the initiation of and recovery from the Flash Crash. Our analysis of these data feed anomalies is ongoing as we attempt to discern whether they were a symptom of the rapid trading that accompanied the Flash Crash or whether they were causal in the sense that they rationally contributed to traders’ decisions to withdraw liquidity and then restore it after the anomalies were resolved.”