SEC: Stock Market "Flash Crash" Caused By Single $4.1B Sale

flashcrash

(O62)

Officials today announced they can trace May’s stock market flash crash to a single transaction. On May 6, 2010, at 2:32 pm, Waddell & Reed Financial of Kansas initiated the sale of 75,000 E-Mini Standard & Poor’s 500 futures contracts. A sale of this size, about $4.1 billion worth, would usually happen over five hours, but instead the trading algorithms sold them within 20 minutes “without regard to price or time.” At 2:42 pm, markets starting plunging 5% in five minutes.

eminivolumevprice.jpgChart showing volume of e-mini sales skyrocketing as their market shrivels.

By 2:47, the Dow was down 9.1%, almost half the size of the Black Monday crash of 1987.

accenturepenny.jpgSome stocks went to pennies within minutes. Accenture, shown at left, fell from above $40 at 2:47 to $0.01 at 2:48.

But then within 90 seconds, the Dow was back up 543 points and ended up closing out down only 3.2% overall.

Just as quickly as the robots freaked out, other robots reacted to restore equilibrium.

The findings were announced today in a 104 page joint SEC-CFTC (Commodity Futures Trading Commission) report (PDF).

However, not everyone agrees with the results. Popular financial blog Zero Hedge called it a “104 ply piece of toilet paper.” Futures exchange CME Group blasted the report, saying that this one trade was a drop in the ocean that no one was paying any attention to, and that its timing doesn’t jibe as being the cause for the series of events that followed. “To blame the initiation of the collapse on this order, which is entirely in line with what Globex handles virtually every day on the close, is asinine,” wrote market-ticker.org.

Ever since May 6, experts and investors have puzzled over what caused the sharp drop, and sharp rise, in prices. Conspiracy theories and accusations of market manipulation abounded.

Some theorized it was a “fat-fingered” trade that sparked the selloff, meaning that someone had typed into too many 0′s by accident. Others pointed to another big selloff by large investment firms 30 to 15 minutes before the crash and said that the fix was in.

Analysts bored over trading data and found enough evidence of “crop circles” and other odd patterns in the buy-sell data – traces left by brokerage’s mechanized high-frequency trading programs – to make for a good sequel to Pi.

cropcriclestocks.jpgMarket analysis firm Nanex has made a hobby of posting the “crop circle of the day” that they find in the trading data.

The inability of anyone to figure out what caused the crash has only stoked investor insecurity over the past few months and fueled the popular demonization of the new breed of traders who use computer programs that can quickly execute trades within milliseconds, taking advantage of momentary gaps in the market to quickly rack up profits. Feeling like the game is rigged, individual investors have withdrawn over $33.12 billion from the stock market this year.

The SEC has since instituted “circuit breakers” which shut off the trading on a stock if the price changes by 10% or more within a five minute period. At the rate the technological arms race is going, with firms paying big bucks just to move their servers closer to exchange so their already speed-of-light transactions can be just that faster, it won’t be too long before the SEC has to shrink that time frame even further.

A Single Sale Worth $4.1 Billion Led to the ‘Flash Crash’ [NYT]
FINDINGS REGARDING THE MARKET EVENTS OF MAY 6, 2010 (PDF) [SEC]

FURTHER READING
Nanex Flash Crash Summary Report [Nanex]

PREVIOUSLY
Stock Market Typo/Robot Apocalypse Still Being Investigated
VIDEO: Unusual Selloff 30 Min Ahead Of Crash?
Robot Traders Leaving Behind Bizarre “Crop Circles” In Market Data

Comments

Edit Your Comment

  1. Jabari says:

    What a load of hooey. This is simply HFT computers gone wild, and there isn’t any incentive to fix anything as all the bad trades keep getting canceled. If the big banks would actually have to eat those trades, this crap might stop happening.

    If anyone really whats to know what’s going on, follow ZeroHedge or Karl Denninger’s Market Ticker blogs…

    • ssnseawolf says:

      ZeroHedge is a terrible source of information.

    • PTB315 says:

      First, specifically define what the hell HFT computers means. Not everyone reading this knows what the hell you just said or why what you’re saying is in disagreement with the post. It’s like you dropped a needle on a record at a random point. Not everyone (including myself) can read your comment and have it make any sense without context of your argument.

      I, acknowledging myself as in no way whatsoever an expert as to what that crash was about or even how the stock market is actually run anymore, read your comment as in agreement with the story. A computer stock trading program caused the incident.

      I’m also going to say that I don’t know anything about that blog, its author(s), or their overall expertise in this matter. However, as it is a blog and not a news outlet (involving journalists held to journalistic standards), it makes your 2 sentence dismissal of a 104 page study commissioned by the people who are actually in charge of this shit a little tough to swallow.

      If you care to elaborate why that blog is right, or even what they are saying, instead of assuming everyone reading your comment has all the same thoughts running through their head as you, then your comment would be a lot more accessible. Otherwise, you’re not going to make converts out of people by simply agreeing with the people linked on the Consumerist’s post.

      • grapedog says:

        HFT is High Frequency Trading… as in the article above, comptuers that run thousands of transactions very very quickly. Sometimes those transactions though are not actually executed. they kind of pile up, until the best of the bunch of chosen. it’s gaming the system at it’s worst. it essentially f***’s the common guy just trying to make a trade because the computers buy and sell under him, raising the price/lowering an individuals profit.

  2. Gruppa says:

    I know next to nothing about the stock market, but if this isn’t a clear cut reason that these automated trading algorithms should be banned I don’t know what is. I’ve also read reports about how these algorithms can buy/sell so fast they the “crop circle” patterns. Putting these programs in a place where they can cause so much financial ruin is just a bad idea.

    • Merricat says:

      And those dang gum auto-mo-biles. Always spooking my horse on the way to the market. Also, get off my lawn you damn kids!

      If know next to nothing, then you know next to nothing. Please don’t presume that knowing next to nothing qualifies you to then know more than nothing.

      • Gruppa says:

        So only people who are informed about the subject at hand can have an opinion?

      • qwickone says:

        I partially agree with Gruppa – there is a LOT of information that’s not know about high frequency trading, which had a material impact on these events. In fact HFT makes up the overwhelming majority of trades. It’s not well-regulated (because there’s not enough information/transparency to do so). This ONE trade rocked the financial world, albeit temporarily. I don’t know if banning them is the right option, but something clearly needs to be done. Why do you think CDOs (the things that hid significant risks in the housing crisis) were so sucky? It’s because no one could really understand them. That’s where we are with HFT.

    • sonneillon says:

      I know a great deal about the stock market.

      And I don’t like the machines because they can engage in front running and can be manipulated.

      I think that this flash crash was a result of clever manipulation and it gave someone a 90 second window to make millions or billions of dollars. But I have been called paranoid.

  3. ojzitro says:

    I would put ZERO weight into this conclusion. You have asked the police how the police station got robbed. Truth is, they left the door open, but they’ll never tell you that.

    http://market-ticker.org/akcs-www?post=168028

    • Promethean Sky says:

      Good read. As far as I can tell, he seems to be pretty much on the ball about why this is BS. The details of how the market works aren’t exactly something I’m an expert on, so I can’t say for sure. I’ve read enough about the “quote stuffing” previously though that I’ll agree (tentatively) that it’s an issue.

  4. 24NascarDude says:

    To me, I don’t think we should have automatic shutoffs on selling. I think all of us should be able to buy as much stock as we can afford and sell as much as we have. If people decide to panic-sell all of their stock and lose money that way, that’s their problem.

    Stocks are supposed to be for investing in (i.e., being part owner of) a company. Today, so many people just buy/sell to make a quick buck and have no interest in being a part-owner of a company. It’s so sad that greed is killing our economy in so many ways. We need to be encouraging people to buy stock with the intent to invest in a company, not flip it for a profit (which is exactly what happened in 1929 and exactly what caused the housing bubble). I’m not convinced automatic shut-offs are the answer; but something needs to be done.

    • Merricat says:

      Unfortunately, man isn’t a rational creature and does not always act in a rational manner. Regardless of whether this was an ‘automated glitch’, ‘fat fingered mistake’, ‘intentional deal with unintentional consequences’, or even ‘intentional, all the way’, there needs to be something in place to prevent people who are acting purely out of panic from bringing the whole house down on everyone’s head.

      • AI says:

        Why? The modern stock market is entirely based off of panic and emotion.

        • Merricat says:

          Pretty much every crash, bubble burst, etc., while having roots in poor policy and prior bad decisions, has been the direct result of a small group of people panicking and in their panic, driving the rest of the market into a panic as well.

          That isn’t to say that I think bad economic times could be avoided purely by preventing that panic from spreading, but I am claiming controlling it controls the rate of decent and I think it’s far better to have a soft landing than a hard one.

    • mrchuck85 says:

      You’ve completely glossed over institutional investors who make up the majority of the transactions on a daily basis.

      Individual retail investors don’t have the volume to affect a stock’s price. This wasn’t caused by someone liquidating 300 shares through e-trade.

      Stocks have no singular purpose and It’s your right to take profits from your current positions- locking away wealth because of some sort of misguided “belief” that you should continue to “own” a portion of the company is silly. It’s my money and i’ll do what I want with it.

      http://en.wikipedia.org/wiki/Institutional_investors

    • kc2idf says:

      What would you think of a notion of instead setting up a minimum time period for a market cycle to take place?

      As an example, let’s say 1 second. Buy/sell orders and whatever other fancier objects need processing are put up against a specific time of day at a one-second resolution. Any that are in prior to the start of that second get processed, and sometime in the next 500ms or so, all stock prices are updated, and the updated prices published. Practical upshot: things may happen quickly, but never in a flash.

      Now, I’m sure there’s something wrong with this idea, but I wanted to put it out there as food for thought.

  5. Coelacanth says:

    Curious to know what the size of individual investor’s holdings in equity funds are. Even though $33 billion sounds like a large amount, I’m wondering if it’s merely a blip of the overall market. My naive assumption is that a $33b outflow of investor capital probably represents 1% or less of the overall market, which is barely cause for concern – or at least, difficult to pin the blame on the “flash crash.”

    Personally, I *bought* more shares during the crash precisely because the market event looked to be completely irrational. (No, I didn’t get an “insane” deal, just about 5% off…)

    However, I’m not an economist.

  6. HeyApples says:
  7. DanRydell says:

    “Some theorized it was a “fat-fingered” trade that sparked the selloff, meaning that someone had typed into too many 0′s by accident.”

    Nice spot for a typo.

    With all of the editors consumerist.com has, you’d think someone would proofread.

  8. MongoAngryMongoSmash says:

    Skynet is testing the waters…