A grateful tip of the hat to David Merkel of the excellent Aleph Blog, who left a comment in a previous post directing us to page 79 of the flash crash report.
We previously reported the findings of Nanex, which had attributed the crash in large part to quote-stuffing, a high-frequency trading strategy in which a massive number of buy and sell orders flood the market before immediately being canceled. High-frequency traders can then profit from the delays caused by the cancellations.
The CFTC, which wrote the report alongside the SEC, had previously downplayed that version of events but said it was looking into Nanex’s data. But Friday’s report explicitly contradicts Nanex’s take.
From the SEC/CFTC report:
Some market participants and firms in the market data business have analyzed the CTS and CQS data delays of May 6, as well as the quoting patterns observed on a variety of other days. It has been hypothesized that these delays are due to a manipulative practice called “quote- stuffing” in which high volumes of quotes are purposely sent to exchanges in order to create data delays that would afford the firm sending these quotes a trading advantage.
Our investigation to date reveals that the largest and most erratic price moves observed on May 6 were caused by withdrawals of liquidity and the subsequent execution of trades at stub quotes. We have interviewed many of the participants who withdrew their liquidity, including those who were party to significant numbers of buys and sells that occurred at stub quote prices. As described throughout this report each market participant had many and varied reasons for its specific actions and decisions on May 6. For the subset of those liquidity providers who rely on CTS and CQS data for trading decisions or data- integrity checks, delays in those feeds would have influenced their actions. However, the evidence does not support the hypothesis that delays in the CTS and CQS feeds triggered or otherwise caused the extreme volatility in security prices observed that day.
Meanwhile, the FT has posted its summary of the report. A few paragraphs:
The flash crash of May 6 was sparked by a large sell order for index futures contracts by a single investor to hedge against the risk of a stock market downturn, according to a report by leading US regulators released on Friday.
The 104-page report said that sell order was of sufficient size to spark sales in both futures and cash equities that rapidly wiped nearly $1,000bn off the value in US share market within minutes. …
The report pinpointed the large sale of 75,000 so-called e-Mini futures contracts on the S&P 500 index, worth $4.1bn, which a large institutional investor placed via an automated trading system, called a “Sell Algorithm”.
The investor wanted the order to be completed as quickly as possible and regardless of the price at which the sales would be done. As a result, it was completed within 20 minutes, whereas common practice is for such a trade to be done over several hours. This left other trading systems scrambling to respond quickly enough.
Reuters originally identified that investor as Waddell & Reed Financial several months ago, and Bloomberg Businessweek has just posted a brief profile of the company.
Related links:
The annotated flash crash diagram – FT Alphaville
‘Flash Crash’ report fingers single order – FT
Waddell shows long-term fund can unhinge Wall Street – Bloomberg Businessweek