On Thursday May 6th the stock market took a unexplained and terrifying plunge down 10% during the day.

This highly unusual event called the “Flash Crash” can be seen in real time on CNBC as Erin Burnett is interviewing Jim Cramer on Street Signs.

There are many (some conspiracy) theories as to the cause of the “flash crash,” which call into question the robustness of our nation’s financial systems.

How robust and sound is our financial system when the stock market can fall 10% intraday or about one trillion dollars?

Here are a few of the reported potential causes and conspiracy theories that may have triggered the crash.

  • A trader made a “fat finger” error and pushed the wrong key on his keyboard selling a unusually large amount of contracts which exceeded the supply available. This is essentially a typo error.
  • There was a large legitimate sell order on the S&P e-mini futures contracts which caused all markets globally to react and recalibrate to a lower futures price.
  • Dow component Proctor & Gamble (PG) was either misquoted or mis-priced much lower than it should have been. (Cramer notices this on the video.)
  • The market makers on the NYSE shut down for a few minutes to pause and reflect on the day’s previous 3% fall in prices. This sent existing sell order to smaller exchanges which couldn’t find enough buyers and thus prices fell dramatically.

I bet you thought that was it. But wait there’s more!

  • There were fears over the European sovereign debt crisis and the crashing Euro.
  • Related to the European crisis were images on TV of Greek citizens rioting because of the new fiscal austerity measures placed upon them.
  • Computers trading with each other in fractions of a second all simultaneously decided to sell (similar to the October 1987 market crash). This isn’t so improbable as you might expect, because most of those system’s algorithms (“algos”) were programmed by a similar set of computer and math genius who went to similar schools and were taught similar economic and financial theories.
  • And finally, my favorite: The whole affair could have been orchestrated by TPTB (The Powers That Be) on Wall Street to fleece profits from the masses (triggering stop loss orders at low prices) AND scare Washington into diluting the Financial Reform Bill being debated on Capital Hill that very day.

Here’s what should bother and scare us:

First, no one knows what caused the crash.

Second, an incredible amount of wealth, greater than some nations’ GDP, vanished into thin air over 15 minutes. How safe and secure should we feel?

There are even other possible issues which could have caused this crash and they should cause us to thoroughly examine and rebuild our financial system to be better able to absorb shocks.

Perhaps we’ll find that, like most catastrophes, it was a combination of errors and systemic issues that caused the 10% intraday stock market plunge. The stock market could handle and has handled issues in the past of similar magnitude to those listed above. However, if a few of these occurred during one day, it is doubtful order could be maintained with the current systems in place.

P.S. Does anyone still believe in the efficient market hypothesis and that stocks are ALWAYS perfectly valued?

How about the theory that “there is a buyer at every price point?”