The Securities and Exchange Commission (SEC) released its joint report with the Commodity Futures Trading Commission (CFTC) on May 6’s so-called Flash Crash, but did little else to clarify whether there was any malfeasance involved or whether the report would eventually lead to changes in the way trading is regulated.

The gist of the report is that the market was volatile on May 6 and volume was up on both the futures and equity markets. At 2:32pm, Waddell & Reed, a large trader, scheduled the sale of 75,000 E-Mini contracts, worth about $4.1 billion, as a hedge against an equity position. It was the largest net change in holdings by any trader this year.

Waddell & Reed used an automated execution algorhythm. These algorhythms can take into account time, price and volume. The one the trader chose from a pull-down menu just took volume into account. When trading systems paused due to the unusually high-volume trade, sellers whose orders were in process found there were no buyers at the other end. Their holdings sold for pennies and panic ensued.

“It was an unfortunate selection when markets were already under stress,” said Andrei Kirilenko, senior economist with the CFTC on a joint conference call with the SEC Oct. 1.

The SEC and the CFTC have formed a joint committee to consider and then recommend changes, but a timeline has yet to be established and call participants wouldn’t comment on aspects of the case not covered by the report.


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