May 6 plunge Those that believe afew posts on Stockhouse effects the market are dreaming.
One large firm led to May 6 market plunge
A trading firm's use of a computer sell order triggered the May 6market plunge, which sent the Dow Jones industrial average plungingnearly 1,000 points in less than a half-hour, federal regulators saidFriday.
A report by the U.S. Securities and Exchange Commission and theCommodity Futures Trading Commission determined that the so-called“flash crash” occurred when the trading firm executed a computerizedselling program in an already stressed market.
The firm's trade, worth $4.1-billion (U.S.), led to a chain of eventsthat ended with market players swiftly pulling their money from stockmarket, the report said.
The report does not name the trading firm. But only one trade thatday fit the description in the report. The firm Waddell & Reed,based in Overland Park, Kan., has acknowledged making such a trade thatday.
The free-fall highlighted the complexity and perils of thefast-evolving securities markets. Electronic trading platforms nowcompete with the traditional exchanges. Stocks are traded on about 50exchanges beyond the New York Stock Exchange and the Nasdaq StockMarket. Computers using mathematical formulas give so-called “highfrequency” traders a split-second edge. Electronic errors at highspeeds can ripple through markets.
The stock market was already stressed even before the plunge that day.Anxiety was mounting over the debt crisis in Europe. The Dow Jones hadbeen down about 2.5 percent at 2:30 p.m., when the trader placed anenormous sell order on a futures index of the S&P's index, calledthe E-Mini S&P 500. The trade was automated by a computer algorithmthat was trying to hedge its risk from price declines.
In that one trade, 75,000 contracts were sold within 20 minutes. Itwas the largest trade of that investment since the start of the year.The firm's previous transaction of that size took more than five hours,the report notes. The trade triggered aggressive selling of the futurescontracts and that sent the index sinking about 3 percent in fourminutes.
The report said the design of the firm's trading formula may have amplified the rush to sell.
It said the formula ignored price changes and responded to thevolume of trading. The automated program sped up the firm's selling asother market players began trading the first block of futures contractsthat flooded the market.
In a previous statement, Waddell & Reed acknowledged that it hadsold the contracts to reduce its funds' risk quickly. It said tradersfeared that the European debt crisis could spread to U.S. markets.
The company maintained that the transaction “was not the cause ofany abnormal price action.” It said the move involved just 1 per centof the contracts of that type that changed hands on May 6. The salewould not have caused problems in a normal market, the company said.
“Our portfolio managers and the funds acted in a manner consistent with the interests of their fund shareholders,” it said.
Nearly 21,000 trades were cancelled in the ensuing weeks because the exchanges deemed them erroneous.
Responding to the episode, the SEC and the major U.S. exchangesagreed on a six-month pilot program that briefly halts trading of somestocks that mark big price swings. The new “circuit breakers” are ineffect until Dec. 10. Under the rules, trading of any Standard &Poor's 500 stock that rises or falls 10 per cent or more within afive-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 per cent within five minutes.
SEC Chairman Mary Schapiro has said anxiety over the “flash crash”may have contributed to the withdrawal of retail investors from thestock market in recent months.
Ms. Schapiro said recently the SEC will consider imposing so-called“limit up-limit down” requirements that would bar any trades outsidespecified boundaries. Limit up-limit down restrictions, which apply tothe commodity futures markets, impose a maximum price change higher orlower in a given day.
Rep. Paul Kanjorski, D-Pa., who heads the House Financial Servicessubcommittee that oversees the SEC, said the new report “confirms thatfaster markets do not always lead to better markets.”
“While automated, high-frequency trading may provide our marketswith some benefits, it can also carry the potential for serious harmand market mischief,” Mr. Kanjorski said.