The SEC and CFTC joint report on the May 6 stock market “flash crash” was released today and among other things, it confirms the complexity that surrounds how financial markets work today. And, it introduces a little bit of irony into what happened that day, when the stock market cratered in a matter of minutes: the trade that kicked off the chaos was executed through a mechanism often meant to reduce volatility, not create it.
The report said the mayhem began at 2:32 p.m. that day when a mutual fund (since identified as Waddell & Reed) began a hedging strategy to offset risk in its equity portfolio. It wanted to sell $4.1 billion of e-mini futures contracts (these replicate the S&P 500). And it was to be done through Algorithmic trading.
Algo has become more known as computer-executed orders meant to time the market. A piece of economic data is released and an algo traders computer quickly starts selling based on programs that the trader created. But the original algo was meant to take somewhat large orders to buy and sell, split them up and execute them into the market so as not to create disruption or tip off others that a big order was being placed.
