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At 2:45p.m. on Thursday, May 6, George (Gus) Sauter received a frantic call from one of his traders to get in front of a Bloomberg terminal. The Dow Jones industrial average, already down 3.9 percent that day on fears about Greece, was in free fall. In just five minutes the index plunged 573 points. Less than two minutes later, the Dow had rocketed back up 543 points, going on to finish the day down 3.2 percent.

“It was just crazy,” Sauter, chief investment officer of mutual fund giant Vanguard Group, told me a few days later. “I had to go to our fixed-income building, about a five-minute walk from my office. By the time I got there, the market had rallied.”

Crazy, indeed. The aptly named “flash crash” temporarily wiped out more than a half trillion dollars in equity value, shaking what little faith nervous investors had in U.S. markets. Shares of Dow component Procter & Gamble Co., the ultimate defensive blue-chip stock, dropped more than one third in a matter of minutes before recovering almost as quickly, all for no apparent reason. A few other large U.S. companies, including accounting firm Accenture, saw their stocks trade as low as a penny a share, only to close not far from where they had begun the day (nearly $42 a share in the case of Accenture) — again, on no news. By the time the dust settled, a whopping 19.3 billion shares had changed hands, more than twice the average daily U.S. equity market volume this year and the second-biggest trading day ever.

But for me, the single most amazing fact about the flash crash was that no one had a clue as to what had triggered it. Not that I should have been surprised, based on the conversation I’d had two days earlier with Mary Schapiro, chairman of the Securities and Exchange Commission. Schapiro, whose organization is charged with maintaining “fair and orderly” markets, explained to me how the SEC did a detailed study after the October 1987 crash to reconstruct what had happened. “We’ve lost some of the capacity to do that given the dramatic volumes of trading that exist today,” Schapiro said. “But we need to be able to do that to understand where are the vulnerabilities in our marketplace and what are the practices that have the potential to hurt investors and the marketplace in the long run.”

In 1987 the SEC had a much easier task because the vast majority of listed U.S. equities were traded in one place — on the floor of the New York Stock Exchange, where specialists employed by the Big Board’s member firms made a market based on an open-outcry auction system. Today, as a result of a series of regulatory changes designed to increase competition and make the market fairer for mom-and-pop investors, only about one quarter of all U.S. equity trading occurs through the now publicly held NYSE Euronext. And the majority of that trading is done electronically, either by the new NYSE floor specialists, called designated market makers, or on the fully automated NYSE Arca platform. The rest of the trading in U.S. equities is spread across a wide range of venues, including the three other major exchanges (Nasdaq Stock Market, BATS Exchange and Direct Edge) and dozens of broker-dealer-operated trading systems, electronic communications networks (ECNs) and dark pools, where buyers and sellers are matched up anonymously. 

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