A look at the key events of the “Flash Crash”  of May 6, 2010, as reported by the staffs of the SEC and CFTC:

2:30 p.m.: The S&P 500 volatility index is up 22.5% from the opening level, yields of 10-year Treasuries fall as investors engage in a “flight to quality,” and selling pressure pushes the Dow down about 2.5%.

2:32 p.m.: A large trader, previously identified by WSJ as Waddell & Reed, uses an algorithm to sell a total of 75,000 E-Mini contracts valued at approximately $4.1 billion. High frequency and other traders initially absorb the trades.

2:41 p.m. — 2:44 p.m.: Liquidity dries up for that contract and elsewhere as high frequency and other traders begin selling, causing the algorithm to increase the rate at which it feeds the orders into the market. The price of the E-Mini falls approximately 3% in just four minutes.

At the same time, cross-market arbitrageurs who bought the E-Mini sell equivalent amounts in the equities markets, driving the price of the S&P 500 SPDR, a closed-end mutual fund that tracks the S&P 500, down approximately 3%.

2:45 p.m.: The second liquidity crisis occurs in the equities markets as automated trading systems temporarily pauses in reaction to the sudden price declines.

2:45:13 p.m. and 2:45:27 p.m.: Without sufficient demand for the E-Mini contract, high-frequency traders begin to quickly buy and resell contracts “generating a ‘hot-potato.” High frequency traders trade over 27,000 contracts, while buying only about 200 additional contracts net.

2:45:28 p.m.: Trading in the E-mini contract is temporarily paused for five seconds to stop the steep slide in prices. When trading resumes, buyers step in and prices begin to rise again.

2:45:33 p.m.: When trading resumes, prices stabilize, the E-Mini begins to recover, followed by the S&P 500 SPDR.

Source: Wall St. Journal

Other Research Links:

Trading Program Sparked May ‘Flash Crash‘ published by CNN.com Oct. 1, 2010

Blame Algorithm for Flash Crash published by Marketwatch.com