Here's the official word from NYSE on last night's 4:15 SPY flash crash:

"On Monday, October 18, the 4 pm ET closing auction in NYSE Arca primary listed symbols was delayed due to an issue with a software release, causing the auction cycle to run at 4:15 pm ET. These auction prices, occurring at 4:15 pm ET, constitute the official exchange closing prices for these issues, with the exception of ‘SPY.’ All trades in the closing auction in ‘SPY,’ which occurred at a price of $106.46, were ruled to be broken by NYSE Arca Market Management. The official closing price will be marked at [4:15 pm] utilizing the valid prior print of $118.28."

I'll point you at the NYSE ARCA Closing Auction page, which claims that closing auctions are single-price Dutch auctions.  I could imagine this resulting in a flash crash upwards, but not downwards!   I also don't understand how $500M worth of liquidity could have gone through at this price, since this is just supposed to be order-matching. Someone could possibly have known that this were an issue and entered a giant LOC @ 106.46 for 4.5M shares, but that seems unlikely.

Also, if this were really just a simple software error, why didn't they re-run the auction with the submitted bids?  My understanding of the process is that these MOC/LOC orders should all be submitted prior to the 4:15 print, which means that the auction could have been replayed with the correct software.

Edit: Here's a document from ITG that explains the closing auction in more detail.  Also note that there was no share imbalance reported in SPY yesterday.

At exactly 16:15:00 today, the SPDR S&P500 ETF SPY, one of the most traded equity assets in the world, experienced a flash crash.  The first 15 trades in this second executed between 118.25 and 118.40.  However, the next 150 trades were executed at 106.46, 10.5% lower than the previous transactions.  Within less than a single second, just under $500M in notional value traded hands at this flash crash price.  The figure below shows the first of these transactions, all of which went through on exchange P, the Pacific Stock Exchange.


Not much was publicly known between 16:15pm and the release of a Bloomberg article claiming that NYSE Euronext had ruled on cancelling these orders (subject to appeal).  As of 19:00 EST, there is still an 800 share bid at 106.46.

It will be interesting to see in the coming days whether anyone comes forward to appeal these busts.  A comment at ZeroHedge already suggests that these trade cancellations don't meet the SEC's policy.