9 Their Joint Report pointed out that, at the start of the Flash Crash episode, one algorithm’s automated execution of a very large sell order confused and dislocated other algorithms. As a result, many market participants, whether algorithmic or human, refrained from buying, and thus market liquidity decreased sharply, leading to unusual turbulence in several stocks.
Some algorithm-based arbitrage trades contributed to spreading this market seizure to a wide range of individual stock prices, leading to the full-blown Flash Crash. Although algorithmic trading may contribute to market stabilization in normal times, this may not be the case when unexpected events or unknown unknowns occur.