Flash Crash Update: Even Less Reassurance

Here’s a later version of the mainstream media version of what happened on May 6.

As you can see, there’s a bit more detail in terms of WHO and HOW,

but the outlines remain pretty much the same as we described them in our first “scanning” of the various media accounts …

You will note, however, that at least SOME of the questions WE raised initially were also raised by other observers,

and are — minimally — addressed in this updated version …

Enjoy — if you have the stomach for it … 😉 …

Here’s a later version of the mainstream media version of what happened on May 6.

As you can see, there’s a bit more detail in terms of WHO and HOW,

but the outlines remain pretty much the same as we described them in our first “scanning” of the various media accounts …

You will note, however, that at least SOME of the questions WE raised initially were also raised by other observers,

and are — minimally — addressed in this updated version …

Enjoy — if you have the stomach for it … 😉 …

The finger-pointing and speculation that followed the crash on May 6 — Were high-speed traders behind it? A rogue computer program? Financial terrorists? — captivated Wall Street.

But in the report released on Friday, the authorities said they found no evidence of market manipulation.

Instead, the temporary crash resulted from a confluence of forces after a single fund company tried to hedge its stock market investment position legitimately, albeit in an aggressive and abrupt manner.

The mutual fund started a program at about 2:32 p.m. on May 6 to sell $4.1 billion of futures contracts,

using a computer sell algorithm that over the next 20 minutes dumped 75,000 contracts onto the market,

even automatically accelerating its selling as prices plunged.

But there are left lingering questions among many who felt it did not explain why the crash took place on that particular day in May,

or provide any assurance that this could not occur again.

“Extreme volatility of the kind we experienced on May 6 could happen again,” said Representative Paul E. Kanjorski, Democrat of Pennsylvania, in a statement.

No kidding, dude … again, as we said immediately on seeing these accounts …

Also note, this is the most “prominent” official they could get to comment officially — what does THAT say ???

The report set out the sequence of events that began with the sale by Waddell & Reed of 75,000 E-Mini Standard & Poor’s 500 futures contracts, using computer sell algorithms.

Normally, a sale of this size would take place over as many as five hours, but the large sale was executed in 20 minutes, the regulators said.

The algorithm was programmed to execute the trade “without regard to price or time,” the report said, which meant that it continued to sell even as prices dropped sharply.

Here’s where the new material begins, albeit interspersed with what we’ve already related …

The algorithm is one used widely across markets.

It was provided to the firm by Barclays Capital, but it was up to Waddell & Reed to set the parameters dictating the way it sold the futures contracts.

There was no explanation from officials why the firm chose to sell so many contracts all at once,

except to speculate that it was already late in the trading day when it made the sale.

Neither would officials explicitly say whether or not the firm was under investigation,

but they pointed out that the firm had made similar trades in the past.

After the firm started to sell, the report found, many of the contracts were bought by high-frequency traders,

computerized traders who buy and sell at high speed and account for a big part of trading in today’s markets.

As they detected that they had amassed excessive “long” positions, they began to sell aggressively,

which caused the mutual fund’s algorithm in turn to accelerate its selling.

Startlingly, as the computers of the high-frequency traders traded contracts back and forth, a “hot potato” effect was created, the report said,

as contracts changed hands 27,000 times in 14 seconds, but with eventually only 200 actually being bought or sold.

This next paragraphs are a bit of an expansion of the previous accout,

but they STILL don’t explain why it’s so important.

The selling pressure was then transferred from the futures markets to the stock market — which was in the first account —

by arbitrageurs who started to buy the cheap futures contracts but sell cash shares on markets like the New York Stock Exchange.

Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling.

Altogether, this led to the abrupt drop in prices of individual stocks and other financial instruments like exchange-traded funds,

and caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000.

The rout continued until an automatic stabilizer on the futures exchange cut in and paused trading for five seconds, after which the markets recovered.

The report’s findings will be put to a joint S.E.C.-C.F.T.C .advisory committee, which will determine if any new policies are needed.

Following the preliminary report in May, the S.E.C. announced it was instituting circuit breakers on all the stocks in the S.& P. 500-stock index, in an effort to prevent another crash.

It has since expanded the circuit breakers — which halt trading in a stock for five minutes if the price moves by 10 percent or more in a five-minute period — to a broader range of stocks.

In addition, SEC head Mary Schapiro has said she wants to look at the use of stub quotes — an UN-explained term —

and also possibly limits on the speed of high-frequency trading, but some analysts said they still had questions.

“They didn’t explain why it never happened before and if it is unlikely to happen in the future,”

said Adam Sussman, director of research at the Tabb Group.

“In that, it is disappointing,” he told the New York Times.

Indeed, it IS, Adam, and makes us wonder why it took nearly FIVE MONTHS to come up with something

that explains NEITHER why it happened in the past, altho, as we originally noted, it does explain HOW,

NOR what structural conditions need to be changed in order to make sure it DOESN’T happen AGAIN —

PRECISELY AS WE CONCLUDED WHEN WE GOT THE INITIAL ROUND OF REPORTS …

So much for expecting understanding from waiting for further explanation …