The word on the Street right now is that NYSE moved some stocks from normal electronic trading to human-mediated trading at 2:40 PM. They were trying to slow down unusual trading activity in those stocks, and they thought they could do that by giving their human market makers a bit of time to consider prices and do the right thing. Unfortunately, when they stopped electronic trading for those stocks, all the orders they would otherwise have handled got sent to a bunch of smaller electronic exchanges that didn't have enough liquidity. That started to tank a few specific stocks scarily fast, which triggered a bunch of stat-arb trades and plunged the indices down. Once that got bad enough, all the liquidity providers got spooked and backed out of the market for about 10 minutes. Felix Salmon has a good writeup at http://blogs.reuters.com/felix-salmon/2010/05/07/deconstruct... .

This isn't necessarily everything that happened -- there's a ton of other rumors flying around about the yen carry trade and a lot of other random stuff.