I'm not saying it didn't happen, just that it's not something that a "rational" algorithm would do, because the one that's taking liquidity is losing money. Unless they're profiting for reasons other than rebates, that is, which is another small but nonzero possibility.

My favorite theory is a purely technical one. I don't have much supporting evidence beyond the linked site though:

"""In summary, quotes from NYSE began to queue, but because they were time stamped after exiting the queue, the delay was undetectable to systems processing those quotes. The delay was small enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges. This caused sell order flow to route to NYSE -- thus removing any buying power that existed on other exchanges. When these sell orders arrived at NYSE, the actual bid price was lower because new lower quotes were still waiting to exit a queue for dissemination."""

Original report: http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html More news from the same company: http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html

In addition to the crash itself, they also have interesting charts from various algorithms behaving strangely.

Because market makers purchased them at a discount with the hope of selling them for a small profit sometime later in the day. That's what market makers do.