Flash crashes recovery

Question

How do flash crashes recover?

I saw in Wikipedia's flash crash article that the flash crashes usually related to automated trading. I also read about the Ethereum flash crash few days ago that took few seconds to drop to 0.1$.

From an article about the Ethereum crash:

[...] the flash crash was the result of someone placing a multi-million-dollar sell order at market price [...].

Filling this order caused ETH prices to instantly slip 30% to \$224 - which in turn caused 800 stop loss orders and margin liquidations, which further drove > the price down, to as low at $0.10.

I understand that one big sell and another many instant automatic sells dropped the price to the floor, but why it came back in seconds back to where it was before? What bumps the price back up? How flash crashes recover so quickly?

Answer 1

It's important to think of a market order book as an object of more dimension than just price. Available liquidity generally has a huge influence on flash crashes, as once the liquid part of the order book around the current prices is traded, there is often very little standing between that and total collapse, as very few people leave large liquidity in the order book a long way from reasonably traded prices (although that may well change as more of these happen).

Automated systems can rattle all the way down in these situations very easily as they are often much more price and liquidity agnostic than humans, but once liquidity/humans return to the market en masse, they start making their respective judgement calls about what happened and quickly start bidding it back up as liquidity returns and it turns out large, liquid sellers aren't actually happy to sell any meaningful volume at the very low prices.