Splash Crash

A “splash crash” is a flash crash that “splashes” over into other markets, and we encourage everyone to try saying that five times fast.

Technically, a splash crash has never happened, but some warn that it’s only a matter of time before it does. So...what is it, really? It’s basically an input-output overload in one financial sector—say, the stock market—that spills over into other sectors, like bonds, currency exchanges, etc.

When too much trade activity happens in too short of a period of time, all of the algorithms and computer sensors and whatnot freak out and freeze the system until all the buy-sell orders can be matched up and recorded, and peace reigns in the kingdom once again. This is what happened in the flash crash of 2010, a fun little event in which the Dow dropped 1,000 points in a matter of hours before recovering several hundred of those points in another matter of hours. The fear is that, one of these times, now that all of our financial markets and technologies are so interconnected, interrelated, and interdependent, the whole overloading-and-freezing thing won’t be confined to one financial area.

But folks aren’t just sitting around on their hands waiting for splash crashes to splash crash down around them. New security measures were implemented after the 2010 scare to help lessen the likelihood of a complete financial market meltdown happening. The SEC instituted something called “circuit breakers,” which function pretty much exactly like the circuit breakers in our house. When too much activity—or current—is detected, the circuit breaker flips and that specific section of the market loses power until the culprit can be identified and dealt with. So far, these circuit breakers have tripped several times, but no splash crash has ensued. So for now, at least, it looks like they’re doing what they were designed to do.