Flash Crash Is Pinned on One Trade

Regulators investigating the causes of the May 6 “flash crash” singled out a Midwestern mutual-fund company’s computer-driven trade as the catalyst that sent a shaky market into an unprecedented tailspin.

In a joint report on the events of that day, the Securities and Exchange Commission and Commodity Futures Trading Commission portrayed the trade as the leading force behind the selloff, in which the Dow Jones Industrial Average suffered its fastest decline ever.

The report placed relatively little blame on the broad structure of U.S. financial markets, created and overseen by the SEC and CFTC. It didn’t answer a key question: If one trade could cause so much turmoil, why hadn’t that happened before?

“There was no one culprit,” said CFTC commissioner Bart Chilton, noting that the markets were already skittish that May day, partly due to worsening economic news out of Europe. Then, he said, when one firm used a trading program to sell 75,000 futures contracts valued at more than $4 billion, “the markets went into shock.”

The report didn’t name the firm. People familiar with the matter have said it is Waddell & Reed Financial Inc. of Overland Park, Kan. Waddell didn’t comment Friday beyond pointing to a May statement in which it said it doesn’t intend to “disrupt” the market through its trading.

The 104-page report painted a mixed picture of high-frequency traders, who have taken heat for leaving the market that day. High-speed traders magnified the impact of the selling by the mutual-fund firm by quickly dumping futures contracts that they had bought back on the market, the report said. And broadly, these trading firms were aggressive sellers during the downdraft. But it noted that some high-speed firms remained active traders.

The report was perhaps most forgiving of stock exchanges, which the SEC regulates. It said steps made by exchanges contributed to the chaos, but didn’t play a “dominant role” in the flash crash.

Some traders criticized the report for not coming out with thorough proposals for avoiding a repeat of the crash.


Source: Proshare




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