Here's the basic outline of what caused the biggest one-day point decline in the history of the Dow Jones Industrial Average. On May 6, 2010, the primary market makers in the stock market just stopped automatically taking the other side of everyone else's trades. This made the market extremely illiquid. Sell orders had no immediate bids, which basically meant the market became a bottomless pit for a few minutes.
A brief historymight help to explain this. In the old days, important stocks were monitored by so-called "specialists" who worked on the trading floors of the stock exchanges. They were charged with keeping the market "orderly." This meant they would temporarily take the other side of trades when unmatched orders to buy or sell came in.
The government hated these guys. It was constantly accusing them of cheating investors in one way or another. The policy makers did everything they could to wipe out the specialists, replacing them with computers.
As a result of the government's war on specialists, much of liquidity in the market now comes from high-frequency trading computers. Let's call them High Freaks. These things can execute trades at the speed of light.
Mainly, they make money by executing an enormous volume of trades around small price points. You sell for one dollar, they buy for a dollar and one tenth of a cent. They they sell for a dollar and two tenths of a cent. Do that often enough and you're talking real money.