GO
Loading...

'Flash Crash' Triggered by Computer Sell Order: SEC

A trading firm's use of a computer sell order triggered the May 6 market plunge, which sent the Dow Jones industrial average dropping nearly 1,000 points in less than a half-hour.

AP

A report issued Friday by the Securities and Exchange Commission and the Commodity Futures Trading Commission determined the so-called "flash crash" was caused when the trading firm executed a computerized selling program in an already stressed market. Click here to read the full report.

The report does not name the trading firm.

That set off two waves of "liquidity drains," when market players swiftly pull their money from the stock market.

The free fall highlighted the growing complexity and diversity of the fast-evolving securities markets.

Sleek electronic trading platforms now compete with the traditional exchanges, with stocks now traded on some 50 exchanges beyond the New York Stock Exchange and the Nasdaq Stock Market.

Powerful computers give so-called "high frequency" traders a split-second edge in buying or selling stocks — based on mathematical formulas.

The risk looms that electronic errors at high speeds could ripple through markets and disrupt them.

The stock market was already stressed that day prior to the plunge because of anxiety over a mounting debt crisis in Europe.

The Dow Jones was down about 2.5 percent at 2:30 p.m.

when the trader placed an enormous sell order on a futures index of the Standard & Poor's 500 stock index.

The trade on the E-Mini S&P 500 was automated by a computer algorithm that was trying to hedge its risk from prices declines.

The trade triggered aggressive selling of the futures contracts and that sent the index down about 3 percent in four minutes.

Nearly 21,000 trades were canceled because the exchanges deemed them erroneous after the plunge.

Responding to the episode, the SEC and the major U.S. exchanges agreed on a six-month pilot program that briefly halts trading of some stocks that mark big price swings.

The new "circuit breakers" are in effect until Dec. 10.

Under the rules, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more within a five-minute span is halted for five additional minutes.

On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes.