Interestingly enough, Mary Shapiro, the SEC Chairman, admitted [via CalculatedRisk] during her testimony before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises that they didn't know what happened:
At this point, the root cause of the sudden disappearance of liquidity in many stocks is unclear.Hussman on Black Thursday:
Thursday was a fascinating day in the market, featuring a 20-minute span in which the Dow moved from a loss of about 300 points to a loss of nearly 1000 points and then back again within a span of about 15-20 minutes. While the decline and recovery was interesting, the fascinating part was the eagerness of investors to view the decline as a "glitch" in trading. My hope is that the opening quotations in this weekly comment are sufficient reminders that illiquidity is not a "glitch," but a typical feature of panicked markets. In a market where active market makers have increasingly been replaced by "high frequency" trading algorithms that can be switched off at will, it is important for investors to avoid the assumption that there will be a willing buyer close at hand if risk concerns begin to escalate.
If you spend a good portion of your time studying price-volume behavior, "air pockets" of the type we observed last week become familiar parts of the landscape