Planet Money has this to say on the subject today:http://www.npr.org/blogs/money/2010/05/three_letters_to_keep_in_mind.html
Short form: when things get hinky at the NYSE, the NYSE takes a wee break (about a minute) to let humans look at what is going on. But the other exchanges (NASDAQ and on down) do not.
The entities placing orders usually do so in a hierarchy, depending on where the item in question is listed natively (that's not the word they use), which exchanges are currently open for business, cost, turnaround time, blah, blah, bleeping, blah. Historically, the NYSE has tended to have the really high volume stuff, altho R. contends this is no longer true. So investigators are exploring the possibility that the other exchanges weren't ready for the wall of orders that hit them when NYSE took a wee break on some stocks. The proposed solution? Maybe if we take a wee break at NYSE we should take the same break everywhere else, too. I foresee technical difficulties in getting that to happen quickly, but never mind that now. I want to speculate wildly.
So let's say that wall of volume from high frequency traders (who some coverage is saying took a break during the flash crash -- but these are the same people who think a 'b' vs. 'm' illion is a plausible explanation) moves from NYSE to NASDAQ. At least some of that software must know about the wee break -- and know that it means trouble, which triggers some strategy which probably means even faster trading. Bigger wall of volume. And let's make one more big assumption: that wall of volume is, in effect, a denial of service attack on the exchange.
Here's terrible coverage of high frequency traders: some guy, possibly co-lo'd with an exchange.http://abcnews.go.com/Business/wireStory?id=10310147
Here's a decent description of a denial of service attack:http://en.wikipedia.org/wiki/Denial-of-service_attack
"One common method of attack involves saturating the target (victim) machine with external communications requests, such that it cannot respond to legitimate traffic, or responds so slowly as to be rendered effectively unavailable."
I've screwed up with Teh Computers before and brought big iron to its knees (oops with the shell programming and recursion and a simulation). If I were a high frequency trader whose trading strategy went all freaky, jumped from NYSE to NASDAQ and make a zillion requests to trade P&G, none of which were responded to before I decided I'd waited way longer than I usually do so it had probably gotten lost or refused or no one wanted to be the other side of my trade so I reduced my price and tried again. If I'd done that, and brought NASDAQ to its knees, yeah I'd _for sure_ say, no, man, I turned the program off when it got all weird. I had _nothing_ to do with _that_. And I'd hope that none of it got logged or, at least, none of it got found until some other sap got blamed for it. And I'd _really_ be hoping at least 10 other guys had done the same thing so we could all point at each other and say hey, it wasn't all my fault.
ETA: Some people are way more paranoid than me:
I read this _after_ posting the above. And I think these people are wacky. But hey. Fun wacky, right?http://politics.gather.com/viewArticle.action?articleId=281474978221554
"If you could fill up the bid queue with orders all which are way above the last trade then you could disable the bid queue. None of these trades will be filled but could you effectively block others from entering bids. Then, in an instant (electronically), you could kill all your bogus bid orders and enter an oder for one cent and also enter a market order to buy. That order would be filled at one cent. I'm not saying this is exactly how it happened, but this is more plausable than all of the other reports out there."
ETA still more:
NASDAQ upped its bandwidth requirements in February. Up from the 2007 peak.http://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2009-006
ETA even more:
Then in March, they made it so instead of deleting and resubmitting an order, you could _replace_ an order. They did this to try to reduce traffic. Which suggests there was an ungodly amount of this activity going on as "ordinary business".http://www.nasdaqtrader.com/TraderNews.aspx?id=dn2009-010