Saturday, October 2, 2010

Did One Large Trader Cause the May 6 Flash Crash? (Videos) *Did an algorithm trigger the Crash?*

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Did an Algorithm Trigger the May 6, 2010 Flash Crash?

Did One Large Trader Cause the May 6 Flash Crash?

The Securities And Exchange Commission has reported that the May 6, 2010 Flash Crash of the stock markets and the related individual equities was triggered by a single large trader, Waddell & Reed of Overland Park, Kansas. This firm executed a large trade of S&P 500 futures (sold 75,000 contacts, $4.1B, in 20 minutes) via a "computerized trading program", an algorithm. This large trade supposedly began the Flash Crash. The market was already tense from the European sovereign debt crisis and the Greek riots being broadcast live that day. This large sell trade triggered additional selling of, initially, S&P 500 futures contracts which then spread to other indexes and individual stocks.

Was the Waddell & Reed trade, based on an algorithm, the cause of the Flash Crash as a Perfect Storm developed that day? This is the official Securities and Exchange Commission explanation. Others disagree, say the market structure and flaws have not changed, another Flash Crash could occur, and "mini-Flash Crashes have occurred subsequently. In the second video below (link), Joseph Saluzzi of Themis Trading gives the counter-argument (Saluzzi Says `Rogue Algorithm' Didn't Cause Flash Crash).

(Associated Press) A new government report has determined the so-called "flash crash" was caused by a single trading firm executing a computerized selling program in an already stressed market. (Oct. 1)

(Bloomberg) Joseph Saluzzi, co-head of equity trading at Themis Trading LLC, talks with Bloomberg's Mark Crumpton and Julie Hyman about a Securities and Exchange Commission and Commodity Futures Trading Commission report on the May 6 stock market crash. Waddell & Reed Financial Inc.'s routine effort to hedge against losses helped set off a chain of events that turned an orderly selloff into a rout that day, according to two people with direct knowledge of regulators' findings.

Watch Video Here: "Saluzzi Says `Rogue Algorithm' Didn't Cause Flash Crash"

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