Charles R. Korsmo*

The events of May 6, 2010 took high-frequency trading from the edges of public consciousness to being front page news. American stock markets had opened that morning to unsettling rumblings from Europe. The previous day had seen violent protests in Greece against proposed austerity measures designed to avert a default on Greek government debt. The ongoing riots seemed likely to scupper a proposed European Union bailout of Greece, potentially touching off a chain-reaction debt crisis with disastrous consequences for the entire euro zone. Given these inauspicious augurs, it is hardly surprising that investor sentiment was somewhat jumpy and decidedly gloomy for much of the day. Over the course of the morning, prices slid in increasingly volatile trading. By 1:00 p.m., the Standard & Poor’s 500 (“S&P 500”), a well-known index of stock prices for 500 top American companies, had fallen by about 1%—a significant drop, to be sure, but not yet particularly alarming.

Around 1:00 p.m., the dollar value of the Euro started to decline precipitously, and the sell-off in the broader market began to accelerate. The volatility of stock prices increased sharply, triggering automatic slowdowns in trading for numerous stocks traded on the New York Stock Exchange (“NYSE”). By 2:00 p.m., the S&P 500 had fallen a total of 2.9% for the day. Such a large drop is unusual, and undoubtedly cause for consternation, but was nowhere near as severe as the multiple 5%+ daily swings seen at the height of the 2008 financial crisis. Few would have guessed that the stage was now set for the most extraordinary hour in the history of the American stock market.

Continue reading
*Assistant Professor, Case Western Reserve University School of Law. J.D., Yale Law School.