What Really Happened on Thursday?

From the Washington Post:

One way to look at what happened Thursday -- as described by a source deeply familiar with the exchange system -- is to think about U.S. stock exchanges as a series of pools connected by canals.

Each pool has buy and sell orders coming into it. If a pool cannot offer the best price in the market, it reroutes the order to the pool with the best price. This process happens all day long, and keeps the pools at a healthy balance with one another.

On Thursday, investors were selling shares aggressively because of concerns about a potential default by Greece and a financial contagion in Europe. As several stocks declined sharply under heavy selling pressure, the New York Stock Exchange, one of the largest pools, stopped or slowed trading in particular stocks.

As part of that process, the NYSE held on to "buy" orders, in the hopes that it could gather enough of them to meet the selling demand. "Sell" orders that came to the NYSE were rerouted to other exchanges, which were not required to slow trading. Those other exchanges were soon overflowing with sell orders and didn't have enough buy orders to meet them, leading to the rapid decline in prices.

The declines were exacerbated by Wall Street's heavy reliance on computer-trading programs that make lightning-fast decisions, based on complex mathematical rules, about what to buy and sell without human input.