"But the algorithms - that is, automated computer trading systems that represent the so-called "innovation" that the big banks want to make damn sure continue to skim off pieces of the productive economy for them, triggered off and drove enough SELL orders to collapse all bids.
"On a technical level what happened in the DOW is easy: NBBO, or national best bid and offer, was proved to be a JOKE.
"That is, when the NYSE specialist system went into "slow mode", which they do as a protective measure, electronic trading went around it into the "second market."
"That's nonsense - the premise of NBBO is that this is simply not supposed to happen, in that if I come to buy I'm supposed to get the best (lowest) offer, and if I sell I'm supposed to get the best (highest) bid. When NBBO is circumvented by computer systems that are allowed to "trade around" the specialists that have started examining what's going on you have a market that gets instantly gamed by the computers and in this case it caused a crash.
"Let me be clear: Any trader or investor selling got filled at $0.01 in Accenture yesterday while the NYSE had a higher bid, irrespective of whether it took them 30 seconds to fill you or not, should, if there are actually cops on the beat, be able to force the trading venue that filled them to make good on the difference that they were robbed of.
"Of course actually enforcing NBBO in this fashion would likely bankrupt every one of the venues and/or brokerages responsible for the 'reach around", so you can bet it won't happen - you, the trader or investor, will get hosed instead."
-- Karl Denninger
I agree with this, but, there is another angle. Only a very few stocks were affected like this. Why not a broad market computer sellof?
Of course even a very few stocks dropping to a penny could drag the indexes down hard, yet it seemed they dropped just hard enough to avoid the circuit breakers. This means someone would have had to calculate which stocks to crash and by how much to achieve this.
There also seemed to be a rush of volume when the circruit breakers dropped off in the afternoon, from 10 to 20%. It seems like someone gaming the system and knew exactly how to play it.