[ckdhtc]

"I don't know about "often," unless you're talking about trading individual issues where news events introduce a high degree of uncertainty. There's really only been one case of a market-wide drying up of liquidity, which lasted for about 15 minutes during the flash crash."

Actually not true. There was plenty of liquidity during the flash crash. It's just that the people who were selling ended up not liking the price they got. During the flash crash, the market was quite in order, except for a few stocks where all the bids were got (too much sell pressure) and the remaining bids were at $0.01... For most stocks, the market was just fine, just that the spread widened up considerably to take into account the temporary uncertainty in the market. Also, the flash crash took 5 minutes, not 15.

Flash crashes happen in human-traded markets took. Recently there was a flash crash in Indian stocks, where humans mark the trades. In fact, human-traded markets are worse: in 1987, the brokers just stopped picking up the phones, even if technically they had an obligation to do so.