What exactly is a flash crash and why should individuals care? Isn't it just bank's computers temporarily offering stock at a severe discount and then the price going back to normal. It doesn't hurt anyone but the people with poorly programmed algorithms. No trades should ever be broken just because someone can't control their trading bots.
You're describing the stop-loss orders that non-professionals use to protect themselves from losing money when the fundamentals of their companies deteriorate suddenly. A stop loss is a very simple algorithm that is widely available in retail brokerage platforms. (Example stop-loss order: "Sell when the last trade is 3% below my purchase price.")
For instance, you own 100 shares of Pepsi and plan to hold for a while (years, not days). Tomorrow while you are in a meeting, a large-scale accounting fraud at Pepsi is announced, sending the stock down some large %age before the circuit breakers halt the stock. Prudently, you had a stop-loss order limiting your losses to (say) 3%. In this case, the stock probably won't recover when the stock starts trading again.
If the stock had dropped and suddenly recovered due to a non-news flash crash, you would have just lost 3% of your investment for no fundamental reason. The flash crash in essence caused you sell at a localized bottom.
Except that in the real world your stop loss order for PEP probably wouldn't work under that scenario. The price is likely to instantly gap down further than -3%. Or trading may be halted immediately before your order is executed at all. When everyone rushes for the exit at once no market is going to be orderly.
> The price is likely to instantly gap down further than -3%
Right, but in a crash due to news, it is likely to go down and stay down, or at least take some time to recover so you can manually make a decision. In a flash crash it can go down 50% and recover within minutes.
They are different scenarios, and they behave differently.
