Evidence Investing

Planet Money gives a basic explaination of what happend...

"[T]the decline may have been accelerated by a New York Stock Exchange system [Liquidity Replenishment Point, or LRP] that temporarily stops electronic trading in stocks that have fallen sharply. 

The system kicked in yesterday for stocks including Procter & Gamble and 3M, both of which are part of the Dow. It halts electronic trading for roughly a minute, and allows human buyers and sellers to consider the situation.

But stocks that are traded on the NYSE are also traded on other, smaller stock exchanges that are purely electronic. And -- crucially -- the system does not halt trading on those other exchanges.

So here's what may have happened yesterday afternoon:

The LRP was triggered for P&G and 3M, among other stocks. This stopped electronic trading in those stocks, very briefly, on the NYSE. During this brief pause, electronic trade orders were sent to other, smaller exchanges.

Those other exchanges may have been swamped by the volume of orders, Bloomberg and Felix Salmon note.

That's when prices in P&G and 3M briefly fell through the floor. The declines in those two stocks alone accounted for a 400 point drop in the Dow, the head of the NYSE said.

When the human traders at the NYSE stepped in a few seconds later, the prices shot back up again.

What's the upshot?

The heads of both the NYSE and the NASDAQ both suggest that it may not make sense to stop electronic trading of a stock on the NYSE but allow it to continue on other exchanges. "