According to CNN Money the SEC and CFTC report on the May 6 “flash crash” blames it on an unnamed trader’s algorithmic trading of E-Mini contracts, leading to two crashes – one in the broad index and one in individual stocks. [None of this actually makes sense to me. I thought there were already circuit -breakers in place since “Black Monday” to stop crashes. Two. How does a sell-off in the broad index cause steep plunges in particular stocks, but not in others? Three. Why would an order of this size not be broken up? Four. Can you tell I don’t believe this flimsy story?]
“A large investor using an automated trading software to sell futures contracts sparked the brief-but-historic stock market “flash crash” on May 6, according to a report by federal regulators released Friday.
In the 104-page report, staff members at Securities and Exchange Commission and the Commodity Futures Trading Commission said an unnamed investor used a trading algorithm to sell orders for futures contracts called E-Minis, which traders use to bet on the future performance of stocks in the S&P 500 index.
The contracts were sold quickly and in large numbers, according to the report, on a day when the market was already under stress due to concerns about the European debt crisis.
The selling was initially absorbed by “high frequency traders” and other buyers, the report said. But the algorithm responded to an rise in trading volume by increasing the number of E-Mini sell orders it was feeding into the market.
“What happened next is best described in terms of two liquidity crises — one at the broad index level in the E-Mini, the other with respect to individual stocks,” the report said.
In other words, the lack of buyers and the rapid selling of E-Mini futures contracts began to affect the underlying stocks and the broader stock indexes.
As a result, the Dow Jones industrial average plunged nearly 1,000 points, briefly erasing $1 trillion in market value, before regaining much of the lost ground to close lower. It was the largest one-day drop on record.
Waddell & Reed, an asset management and financial planning company based in Overland Park, Kan., has been widely reported as the investor behind the sell order. But the report identified only a “large fundamental investor.”
Waddell said in May that it was one of possibly 250 other investors trading the E-mini futures contract on the day in question, and that it did not intend to disrupt the market.”
Who’s Waddell & Reed? Its website has a brief self-description:
“Founded in 1937, Waddell & Reed is among the most enduring asset management and financial planning firms in the nation, providing proven investment and planning services to individuals and institutional investors.”
Huff-Po adds some details from the SEC report (which I’ll read in a bit):
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 minute”
Now, why December 10? I’ve no idea.
None of this is new. Just after the crash, Zerohedge had the pertinent questions based on a report by Matthew Goldstein at Reuters, which included the following crucial information:
“Waddell’s contracts were executed at Barclays Plc’sBarclays Capital and later given up to Morgan Stanley, according to the document.”
Barclays and Morgan Stanley, of course, played powerful supporting roles in the ongoing looting of mainstreet by the big banks.
At least, no one’s saying it was a just a “fat-finger” anymore.