Source: The Associated Press
U.S. officials say a trading firm’s use of a computer sell order triggered the May 6 market plunge, which sent the Dow Jones industrial average dropping nearly 1,000 points in less than 30 minutes.
A report issued by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission determined the so-called “flash crash” was caused when the trading firm executed a computerized selling program in an already stressed market.
The report does not name the trading firm.
That computerized selling program set off two waves of “liquidity drains,” when market players swiftly pull their money from the stock market.
The stock market was already stressed that day prior to the plunge because of anxiety over a mounting debt crisis in Europe.
Nearly 21,000 trades were later cancelled because the exchanges deemed them erroneous after the plunge.
The free-fall highlighted the growing complexity and diversity of the fast-evolving securities markets.
Sleek electronic trading platforms now compete with the traditional exchanges, with stocks now traded on some 50 exchanges beyond the New York Stock Exchange and the Nasdaq Stock Market.
Powerful computers give so-called “high frequency” traders a split-second edge in buying or selling stocks — based on mathematical formulas.
The risk looms that electronic errors at high speeds could ripple through markets and disrupt them.
The Dow Jones was down about 2.5% at 2:30 p.m. when the trader placed an enormous sell order on a futures index of the Standard & Poor’s 500 stock index. The trade on the E-Mini S&P 500 was automated by a computer algorithm that was trying to hedge its risk from prices declines.
The trade triggered aggressive selling of the futures contracts and that sent the index down about 3% in four minutes.
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% 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% within five minutes.
U.S. report finds one large trader triggered May 6 ‘flash crash’
Computerized selling program set off two waves of ‘liquidity drains’
- By: Marcy Gordon
- October 3, 2010 October 3, 2010
- 12:55