As described by Nanex LLC's Eric Scott Hunsader,
Retail stop orders await execution, typically at common price intervals (0.00, 0.25, 0.50) at the Wholesaler. Wholesalers know those price levels and can anticipate and exacerbate the downside movement to increase net profits.
How?
Wholesalers create a composite view of the Order Book (Bid/Offer at each Price Level) across all exchanges.
When the Wholesaler recognizes that the book pressure on the Offer side is much larger than available Bids, a clear sign that the stock is about to decline, the Wholesaler can react by adding more Short Sales to the Offer, further ensuring the Retail stop order limits gets pierced.
The retail stop orders then get triggered as the stock prices drops from the heavy Offer side pressure and few marketable bids.
After the rapid price dislocation, the composite view of all Exchange order books begins to balance out as Marketable Bids come into the market and offset the Offers.
The Wholesaler and HFTs then cover their short-sales, buying from Retail investors near the temporary low, just prior to the stock recovery.
The stock reverts, flash crash over.
And there you have it - instant profits and massive gains for wholesalers; even faster, high-frequency losses for retail traders. So easy, in fact, that a vacuum tube collocated next to NYSE's laser can do it.... about 1 million times per second.