The Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) jointly released a report on Sept. 30 detailing the likely causes of the “Flash Crash” that occurred on May 6, 2010. According to the report, one large fundamental trader that is not identified entered an order to sell 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.
According to the report, “This large fundamental trader chose to execute this sell program via an automated execution algorithm (‘Sell Algorithm’) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.”
This happened at a time when the markets were already experiencing distress and the result was the massive fluctuation that occurred within minutes as the algorithm executed the orders within 20 minutes. The result was a liquidity crisis in both the E-minis and in individual stocks further exacerbating the situation.
The report goes on to detail lessons that were learned including a reminder of the interconnectedness of the markets and the potential an individual trader has to affect the entire market. It goes on to say the two Commissions will continue to evaluate the use of the new single stock circuit breakers that were instituted after the flash crash and evaluate ways in which data is delivered.
In a joint statement, CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro said, ““We appreciate the incredible effort of all the professionals at both agencies who have worked tirelessly, scouring the data, interviewing market participants and reconstructing the events of May 6th. This report identifies what happened and reaffirms the importance of a number of the actions we have taken since that day. We now must consider what other investor-focused measures are needed to ensure that our markets are fair, efficient and resilient, now and for years to come.”
Joint SEC-CFTC Report on the Market Events of May 6, 2010