Tags: Trader | May | Flash | Crash | stock | Computer | Trade

Govt Report: One Large Trader Triggered May Flash Crash With Computer Trade

Friday, 01 Oct 2010 12:52 PM

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.

A report issued Friday by the Securities and Exchange Commission and the Commodity Futures Trading Commission determined the so-called flash crash was caused when the trading firm executed a computerized selling program in an already stressed market. That led market players to swiftly pull their money from the stock market.

The report does not name the trading firm. But a person with direct knowledge of the investigation said the firm is Waddell & Reed, based in Shawnee Mission, Kan. The person spoke on condition of anonymity because he was not authorized to identify the firm.

The free fall highlighted the growing complexity and diversity of the fast-evolving securities markets. Sleek electronic trading platforms now compete with the traditional exchanges, with stocks now traded on some 50 exchanges beyond the New York Stock Exchange and the Nasdaq Stock Market. Powerful computers give so-called high frequency traders a split-second edge in buying or selling stocks — based on mathematical formulas.

The risk looms that electronic errors at high speeds could ripple through markets and disrupt them.

The stock market was already stressed even before the plunge that day. Anxiety was mounting over a debt crisis in Europe. The Dow Jones Industrial Average was down about 2.5 percent 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.

In that one trade, 75,000 contracts were sold in a span of 20 minutes. It was worth $4.1 billion and was the largest 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 percent in four minutes.

Nearly 21,000 trades were canceled in the ensuing 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. The new "circuit breakers" are in effect until Dec. 10. Under the rules, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more within a five-minute span is halted for five additional minutes.

On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes.

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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. A report issued Friday by the Securities and Exchange Commission and the Commodity Futures...
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2010-52-01
Friday, 01 Oct 2010 12:52 PM
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