The Markets October 1, 2010

Regulators Release Flash Crash Probe Report

A trading firm’s use of a computer sell order triggered the May 6 market plunge, which sent the Dow Jones industrial average dropping nearly 1,000 points in less than a half-hour.

Reported by

Fred Schneyer

A report issued Friday by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) determined the so-called “flash crash” was caused when a trading firm executed a computerized selling program in an already stressed market, the Associated Press reported. The firm’s trade, worth $4.1 billion, led market players to swiftly pull their money from the stock market.

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While the report does not name the trading firm, an unnamed Associated Press source identified it as Waddell & Reed, based in Shawnee Mission, Kansas.

The stock market was already stressed even before the plunge that day, according to the report, and anxiety was mounting over a debt crisis in Europe. The Dow Jones was down about 2.5% at 2:30 p.m. when the trader placed an enormous sell order on a futures index of the S&P’s index. The trade on the E-Mini S&P 500 was automated by a computer algorithm that was trying to hedge its risk from price declines.

According to the Associated Press, in that one trade, 75,000 contracts were sold in a span of 20 minutes. It was the largest single trade of that investment since the start of the year; the firm’s previous transaction of that size took more than five hours, the report notes. The trade triggered aggressive selling of the futures contracts and that sent the index down about 3% in four minutes. Nearly 21,000 trades were canceled in the coming weeks because the exchanges deemed them erroneous.

Responding to the episode, the SEC and the major U.S. exchanges, agreed on a six-month pilot program that briefly halts trading of some stocks that mark big price swings (see SEC Approves, Extends New Circuit Breakers). The new circuit breakers are in effect until December 10. Under the rules, trading of any Standard & Poor’s 500 stock that rises or falls 10% or more within a five-minute span is halted for five additional minutes, the AP said.

The 104-page SEC-CFTC report is at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.