“A trading firm’s use of a computer sell order triggered the May 6 market plunge, which sent the Dow Jones industrial average careening nearly 1,000 points in less than a half-hour, federal regulators said Friday,” Marcy Gordon and Daniel Wagner report for The Associated Press.
“A report by the Securities and Exchange Commission and the Commodity Futures Trading Commission determined that the so-called ‘flash crash’ occurred when the trading firm executed a computerized selling program in an already stressed market,” Gordon and Wagner report. “The firm’s trade, worth $4.1 billion, led to a chain of events that ended with market players swiftly pulling their money from the stock market, the report said. The report does not name the trading firm. But only one trade that day fit the description in the report. The firm Waddell & Reed, based in Overland Park, Kan., has acknowledged making such a trade that day.”
“The stock market was already stressed even before the plunge that day,” Gordon and Wagner report. “Anxiety was mounting over the debt crisis in Europe. The Dow Jones had been 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, called the E-Mini S&P 500. The trade 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 within 20 minutes. It was the largest trade of that investment since the start of the year,” Gordon and Wagner report. “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 sinking about 3 percent in four minutes.”
“The exchange where the E-Mini trades occurred agreed that the trade by Waddell & Reed probably didn’t spark the plunge,” Gordon and Wagner report. “The exchange operated normally and the trade was proper, Chicago Mercantile Exchange Inc. said in a statement. It said the plunge probably resulted from widespread concern about news events. It said E-Mini prices often change just before price swings in the broader financial markets.”
“Nearly 21,000 trades were canceled in the ensuing weeks because the exchanges deemed them erroneous,” Gordon and Wagner report. “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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