NEW YORK — A long-anticipated government report about the so-called “flash crash” of May 6 blamed the stock-market plunge on an unusual order placed by a single firm that set off a cascade of selling among computer-driven, high-frequency traders.
Investigators from the Securities and Exchange Commission and the Commodity Futures Trading Commission found that the crash was set off by a single trading firm’s effort to sell $4.1 billion of an indexed stock future contract known as an “E-Mini.” Trades of this size are frequently made using a combination of computer programs and human interaction, but in this case, the firm relied only on its algorithm.
After the firm placed its sell order at 2:32 p.m. May 6, it caused a sell-off among other computerized traders. Within 15 minutes, the Dow Jones industrial average fell more than 600 points. While most of those losses were made up quickly, the crash has been blamed for some of the slowdown in the markets in the months since the crash.
For legal reasons, the report did not name the firm that placed the controversial trade — and describes it only as “a large fundamental trader (a mutual-fund complex).” But Waddell & Reed Financial Inc. of Overland Park, Kan., reportedly was the firm that executed the trade.
The company could not immediately be reached for comment on Friday’s report, but it has earlier said that it was trading that day in an effort to hedge its risk and that, “like many market participants, Waddell & Reed was affected negatively by the market activity of May 6.” The report says that the firm did not intend to disrupt the markets with its trade.
The investigators said that a single trade was able to have such a disastrous effect because of the already precarious state of the markets. Fears of a European economic crash had been exacerbated the morning of the crash, and before the crash happened the Dow was down 2.5 percent.
Waddell & Reed’s effort to sell off such a large number of “E-Mini” contracts led to a decline in the price of the contracts, which then led traders to also stop trading other stocks.
Investigators found that traders “feared the occurrence of a cataclysmic event of which they were not yet aware, and that their strategies were not designed to handle.”
Rep. Paul Kanjorski, D-Pa., who chairs a House subcommittee that oversees capital markets, said the report shows regulators need to revise their rules and Congress might also need to act to prevent a repeat.
“The SEC and CFTC report confirms that faster markets do not always lead to better markets,” he said. “While automated, high-frequency trading may provide our markets with some benefits, it can also carry the potential for serious harm and market mischief.”
