What Is a Flash Crash?
A flash crash is a sudden, sharp decline in the price of an asset or security. It usually occurs within minutes and can be caused by a variety of factors such as high-frequency trading algorithms, news events, or large sell orders. Flash crashes are often associated with stocks but they can also occur in other markets such as commodities and currencies. The rapid nature of these declines makes them difficult to predict and manage for investors.
Flash crashes have become increasingly common since the advent of algorithmic trading which has allowed traders to execute trades at lightning speed. High frequency traders use sophisticated computer programs that analyze market data quickly and make decisions on when to buy or sell securities based on predetermined criteria. These automated systems can cause prices to move rapidly up or down depending on their activity levels which may lead to flash crashes if there is not enough liquidity in the market at any given time. As a result, regulators have implemented measures designed to reduce volatility during periods where flash crashes are more likely to occur such as circuit breakers that temporarily halt trading until order books stabilize again.