Early theories:

On may 6th, 2010, American stock market just crashed without any warning, which
wiped out trillion dollars off value of American companies in just 20 minutes.
At first when the requlatory agencies of US announced investigation against the
crash, no particular reason was identified for the 600 point plunge in the market.
however with going after numerous possible causes, theories such as fat finger,
impact of high frequency traders, large directional bets, …… came in.
1. Fat finger theory:
immediately after the plunge, several report claim this to be triggered by fast
finger trade. fat finger error is a mis-click or human error input through
computers in the financial market. they believed that this was accidently
executed large sell order for P&G STOCKS, however this theory was soon
disapproved as P&G’S decline occurred only after the decline of E-MinI S&p
SHARES

2. Impact of high frequency traders:

Requlators determined that high frequency traders aggressively sold their
positions and withdrew from the market because of uncertainty seen in the
market. most of the regulators and other theories also supported that HFTs
were highly contributing for the crash.

3. Large directional bets:

large directional bet of E-MINI S&P 500, which triggred the chain of events of
the crash. Many reports believed that crash was triggered by single sale of
75,000 e-mini contracts by W&R.

4. Changes in market structure:

It was also believed that these sort of event were bound to happen due to the
decentralize of trading

5. Technical glitches:
Another theories responsible for the crash was believed to be the technical
glitches as technical problems on new York stock exchange led to delay 5
minutes in its quotes. This was said to be contributed in drying up the liquidity.
However, with all these theories, after 5 years of investigation, a man named
Navinder sarao was arrested with 22 criminal charges with a claimed that he made
around 40 million dollors from the plunge.
He was suspected of manipulating the E-min futures contract by using the Spoofing
strategies where he placed and cancelled hundreds of orders without any intension
of executing them.
Sarao used layering alogrithim and an automated trading program for this, where it
set THE large sell orders in the E-MINI ORDER BOOK, which where all at different
prices above the best asking price. These orders were so large that it was around 40%
of total active sell order of the market.
So, because of this, regulators blamed narvinder that he had overloaded the sell side
with lowered prices. And when he stopped overloading the sell side, the price
rebounded.
from this Navinder attempted to lower the price and took advantage of the drop by
repeatedly selling the e-mini contracts ang buying them back at lower prices.

CFTC also claims that, On the day of crash, Navinder put in about 170 million dollar
worth of sell order which was replaced and modified around 19,000 times and
profited him about 40 million dollars.
So, despite various other reason, flash crash significantly caused because of
imbalance between buy and sell orders which caused in high drop in liquidity.

Moreover, CFTC report also claims that principle reason behind the imbalance was
that a large fundamental trader of mutual fund complex initiated to sell 75,000 E-
Mini contracts worth of 4.1billion dollars as a hedge against its existing position. This
was caused by the Lousy algorithm used by the mutual fund resulting for the
imbalance.

The immense volatility compelled many high-frequency traders to close their trading
in higher rates. Later, The trading of E-Mini S&P contracts was paused to prevent it
from further declines. When the trading of the contracts resumed, The markets
started to regain their positions as the prices of many securities returned to near
their initial levels. Causing a flash crash which just lasted about 20-30 minutes.

However, even with all these, we cannot point a single cause responsible for the
crash.
However, we can name contributing factors such as:
1. There was great fear on that day about the European debt crisis and euro was
sharply declining
2. there were very severe buy and sell imbalances midday, which were likely
caused by numerous factors and participants
3. liquidity dried up as investors chose to back out from trading
4. market structure was instable due to decentralized trading and fragmentation

so all in all, Authorities also doesn’t know what exactly went wrong till date. So we
cannot blame a single factor or Navinder for the crash. However Navinder’s action
was the main part to push down the market which ultimately triggered the market
crash.