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]

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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