The Truth Behind the Flash Crash: The Cause Finally Discovered

Those quick to blame algorithmic trading and HFTs for the Flash Crash of 2010 could stand to take a look at the SEC’s recent report on the events of May 6th. The October 1 report suggests that a single sale of $4 billion of futures contracts from the Kansas based mutual fund company Waddell & Reed Financial was the direct cause. Still, those findings are not accepted by all, who maintain it was a domino effect caused by a variety of circumstances.

Stub Quotes
In agreement with an addendum in the SEC report that placed a small amount of liability on stub quotes, heads of all of the major stock market exchanges are calling for a ban on the practice. Experts say that a majority of the effect of the flash crash could have been avoided if algorithmic computer programs hadn’t moved to execute buy and sell orders at the unrealistic prices put in place by stub quotes.

The Aegean Contagion
The fact that the market was already experiencing unusually turbulent activity as a result of the 2010 Euro Crisis has been pinpointed by many as the true genesis of the commotion that developed on May 6th. Without this major plot point already creating nervousness among investors, it’s said that much of the panic that ensued on Wall Street simply wouldn’t have happened.

Automated Execution
Algorithmic traders don’t get off “scot-free.” The SEC report also says that automated execution that takes place during times of high market stress can only serve to exacerbate an already volatile environment.

Dissecting the Flash Crash
Analysis of the flash crash is likely to continue as more voices are heard on the matter. As of this moment, the only changes put into place have been by way of circuit breakers that are still in a testing phase. On May 6th, 2010 the stock market experienced the equivalent of a minor heart attack—and it’s expected that, acting in the overall best health interests of all investors, the SEC will implement more regulatory restrictions in the coming months.

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