The Flash Crash: Trading Aggressiveness, Liquidity Supply, and the Impact of Intermarket Sweep Orders

AuthorTom McInish,Robert A. Wood,James Upson
Date01 August 2014
Published date01 August 2014
The Financial Review 49 (2014) 481–509
The Flash Crash: Trading Aggressiveness,
Liquidity Supply, and the Impact of
Intermarket Sweep Orders
Tom McInish
University of Memphis
James Upson
University of Texasat El Paso
Robert A. Wood
Provo, Utah
During the Flash Crash on May 6, 2010, a short period of high stock market volatility,some
stock prices declined to $0.01, while others increased to $100,000. Examining Intermarket
Sweep Orders (ISOs) before, on, and after May 6, we find that ISO use is substantially higher
on May 6. For those stocks whose prices fell the most, over 65% of the sell volume comes
from ISOs. During the price recovery period for these stocks, about 53% of the buy volume
comes from ISOs. Webelieve that the unusual behavior of ISOs contributed to the sudden drop
and recovery of the market.
Keywords: flash crash, intermarket sweep orders, market quality, regulation NMS
JEL Classifications: G14, G18, G19
Corresponding author: Department of Economics and Finance, Universityof Texas at El Paso, 500 West
University,El Paso, TX 79968; Phone: (915) 747-7758; Fax: (915) 747-6282; E-mail:
C2014 The Eastern Finance Association 481
482 T. McInish et al./The Financial Review 49 (2014) 481–509
1. Introduction
On the afternoon of May 6, 2010, U.S. stocks suffered one of the most severe
sell-offs in history, with the Dow Jones Industrial Average (DIJA) dropping almost
1,000 points in a matter of minutes, only to recover a significant portion of the loss
later the same day. This price drop, knownas the Flash Crash, raises serious questions
about the stability and structure of U.S. equity markets. A blog dated May
7, 2010 (with the suggestive title: “Accenture’s Flash Crash: What’s an Intermarket
Sweep Order?”) provides anecdotal evidence that a relatively new kind of order, the
Intermarket Sweep Order (ISO), may have played a significant role in the crash.1An
ISO is a limit order that executes in a designated market center evenif another market
center is publishing a better quote.2
Accenture (ACN) is not the only company to experience extreme prices. We
define an extreme price as a trade at $0.01 or $100,000.3Table 1 presents stocks
that experienced an extreme price on May 6 and the number and volume of trades
for these stocks that are ISOs and Non-Intermarket Sweep Orders (NISOs).4Apple
(AAPL) had four trades, all ISOs, at a price of $100,000 with a total volume of 1,790
shares. ACN is the odd stock out with only one of the 37 trades at $0.01 representing
an ISO.
To providemore insight into the role of ISOs in the Flash Crash, we examine the
100 trades preceding the first minimum price trade. We examine the starting price of
the series, the extreme price, the percentage of ISO volume and trades, the number
of ISOs that occur in a sequence without any NISOs (ISO run), and the elapsed time
in seconds from the first trade to the last trade. For stocks that have an unrealistically
high price, this price occurs after the minimum price.
The percentage of ISO volume and trades is over 50% for almost all of the
stocks. The most rapid price changes are for ticker BID, moving from a starting price
of $39.54 to an extreme price of $100,000.00 in 1.296 seconds with an average time
between trades of about 13 milliseconds. ACOM exhibits the slowest price change
of over 1,550 seconds.
1This can be found at
2From a regulatory standpoint, the ISO came into existence in the wake of the adoption of the Regulation
National Market System (Reg NMS). Specifically,Rule 611 of Reg NMS, known as the Order Protection
Rule, created enforceable penalties if one market center executed a trade at an inferior price, while another
market center was posting a better price. The ISO is an important exception to the Order Protection Rule
specified in paragraphs (b)(5) and (b)(6) of the rule.
3Our findings for stocks with extreme price increases are similar to those for stocks with extreme price
decreases. Therefore, we largely focus on the latter.
4ISOs are defined in the Daily Trade and Quote (DTAQ) file with condition code F. All other trades are

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