What Is a “Flash Crash” and How Does It Demonstrate the Risk of Exchange Isolation?

A flash crash is a rapid, deep, and brief drop in an asset's price, often triggered by a large, automated sell order in a low-liquidity market. It demonstrates the risk of exchange isolation because if an exchange's Spot Price is isolated and used for derivatives, a flash crash on that single venue could trigger a cascade of unfair liquidations, even if the asset's price on other global exchanges remains stable.