US regulators have concluded that a single trade by a 'large fundamental trader' helped trigger a brief market crash on May 6.
Internal exchange documents have identified the trading firm as Waddell & Reed Financial Inc, but the report authored by the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) did not identify it by name.
The so-called flash crash sent the Dow Jones industrial average down some 700 points in minutes, exposing flaws in the electronic marketplace dominated by high-frequency trading.
Trading on that day was turbulent due to concerns over the European debt crisis. Against that backdrop, a 'large fundamental trader' initiated a sell programme to sell 75,000 E-Mini futures contracts as a hedge to an existing equity position, according to the 104-page report.
On May 14, Reuters reported that Waddell sold a large order of E-Mini futures contracts during the market plunge, identifying the firm to which CFTC Chairman Gary Gensler had alluded in congressional testimony.
Waddell chose to execute this sell programme through an automated execution algorithm, resulting in the largest net change in daily position of any trader in the E-Mini since the beginning of the year, according to the report.
When markets were already under stress May 6, the algorithm executed the sell program 'extremely rapidly in just 20 minutes', regulators said.
The report lays the foundation for a special commission to recommend new rules to avoid a repeat of such a crash. The SEC and CFTC are drafting nearly 200 rules required by US Wall Street reform legislation.
