Earlier this month the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) released their report detailing the events of May 6. While that report points to a single sell order by a large mutual fund, identified by media sources as Waddell & Reed, as the culprit that caused the “flash crash,” that conclusion quietly has been called suspect by many. Now one data processing firm, Nanex, has come forward with an interpretation of the day’s events which recasts the fund and other players of the day.
According to Nanex’s report, the conclusion drawn in the CFTC and SEC joint report unduly casts Waddell & Reed as a negligent trader that almost single-handedly brought down the entire financial complex. While the official report points to the algorithm the fund used that day to sell 75,000 S&P E-mini contracts as the source of the day’s confusions, the Nanex report says, “First of all, the Waddell & Reed trades were not the cause, nor the trigger. The algorithm was very well behaved; it was careful not to impact the market by selling at the bid, for example. And when prices moved down sharply, it would stop completely.”
The Nanex report goes on to show that the majority of the contracts Waddell & Reed sold that day were done after the markets spiked downward. Instead of this large sale, Nanex identifies the buyers, specifically high frequency traders, of those contracts as the true culprits. “The buyer of those contracts, however, was not so careful when it came to selling what they had accumulated. Rather than making sure the sale would not impact the market, they did quite the opposite: they slammed the market with 2,000 or more contracts as fast as they could,” their report says. “As time passed, the aggressiveness only increased, with these violent selling events occurring more often, until finally the e-Mini circuit breaker kicked in and paused trading for 5 seconds, ending the market slide.”
Ultimately, the Nanex report says it was these buyers of the Waddell & Reed contracts that hit the markets with enough force to have repercussions across multiple markets. “In summary, the buyers of the Waddell & Reed e-Mini contracts, transformed a passive, low impact event, into a series of large, intense bursts of market impacting events which overloaded the system. The SEC report uses an analogy of a game of hot-potato. We think it was more like a game of dodge-ball among first-graders, with a few eighth-graders mixed in. When the eighth-graders got the ball, everyone cleared the deck out of panic and fear,” Nanex says.