NEW YORK - A single trader executing an unusually large and fast sale using a complex computer algorithm triggered the "flash crash" that sent the Dow Jones stock index plummeting nearly 998 points in matter of minutes on May 6, a new report from two regulators said Friday.
The 104-page report by the Securities and Exchange Commission and the Commodity Futures Trading Commission is likely to lead to new restrictions on computer and technology-accelerated trading of stocks. It's also sure to put super-fast trading - called high-frequency trading - under the regulatory microscope.
The dizzying drop erased billions of dollars in stock-market wealth in seconds and is largely blamed for an exodus of average people from the market amid a growing perception that the game is rigged in favor of large Wall Street players.
The report identified the trader only as a large investment fund, though McClatchy Newspapers has learned the culprit was Waddell & Reed Financial, based in the Kansas City suburb of Overland Park, Kan. Last May, Waddell & Reed executives said their own analysis led them to conclude they did not spark the flash crash.
The report was silent on whether criminal charges could result. The firm had no comment Friday on the report, and a phone call placed to its office wasn't answered.
Trading was already volatile on that May day, the regulators said, when the large trader executed a sell order totaling $4.1 billion on what's known as the e-mini futures market, an electronic market that bets on the price of futures contracts.
The trader was trying to take advantage of a price difference between the e-mini futures market for the Standard & Poor's 500 and a stock index fund that tracks the S&P 500. (Futures are financial transactions based on a price anticipated at some point in the future, and stock index funds seek to mirror the movements of a stock index.)
In executing the trade, the large trader used a computer algorithm that sold on the basis of volume, not price. That triggered a chain reaction as high-frequency traders rapidly bought and sold in a high-tech version of hot potato. Then, with the market overheated, the computers shut down, leading to a collapse in prices.
Bart Chilton, a member of the CFTC, which regulates the futures market, said the situation could have been even worse, had the trade been executed earlier in the day, when markets in Europe were still open. That might have set off a global financial panic.
by Kevin G. Hall McClatchy Newspapers Oct. 2, 2010 12:00 AM
Report: 1 trade cited in Dow 'flash crash'
