Culprit In ‘Flash Crash’ Identified

October 4th, 2010

How one company broke the Internet stock market.

The SEC and FTC just completed their report on the May 6th “flash crash” that resulted in a sudden loss of more than 600 points on the Dow Jones Industrial Average. The market rebounded, but not before a few trader meltdowns.
The report says that the crash resulted from a single big trade, which happened to be executed on a day when the market was already unstable due (in part) to fears about European debt.
Apparently a large trading company (which the WSJ identifies as Waddell & Reed Financial, a mutual fund company in Kansas) sold tens of thousands of futures contracts using a computer trading program. The sudden sale scared day traders into dumping their futures contracts and further destabilizing the market.

The DJIA’s 600-point crash was its fastest decline ever.
The trade in question involved selling over $4 billion in futures contracts at one time.
A total of 75,000 futures contracts were sold.