UPDATE: CME: Algorithm At Center Of 'Flash Crash' Worked Properly
November 04 2010 - 6:24PM
Dow Jones News
A senior executive with CME Group Inc. (CME) Thursday defended
the trading activity cited by regulators as touching off the "flash
crash" of May 6, describing the algorithm as "sophisticated" and
contradicting regulators' characterization of the issue.
An algorithm-powered order to sell 75,000 futures contracts
linked to the S&P 500 stock index, entered by a mutual fund as
the session's volatility ramped up, did take into account price and
time parameters, according to Scot Warren, managing director of
equity indexes for CME.
"This was a sophisticated algorithm that took time and price
into consideration," said Warren, contesting descriptions of the
trade as an emergency bet that helped spark a rout in stock
prices.
Warren, speaking at an industry event Thursday, said the
session's activity revealed a "fundamental supply-and-demand
imbalance" that spooked buyers from the market.
The flash crash saw the Dow Jones Industrial Average in late
afternoon drop by 700 points in a matter of minutes before staging
a partial recovery. Fears about the European credit crisis already
had weighed on stock indexes that day, and a slowdown in data feeds
from stock markets alongside rising price volatility prompted major
trading firms to pull out of the market--leaving fewer buyers to
absorb a wave of selling.
On Oct. 1 regulators released a 100-page report on the event,
identifying the mutual fund trade as a key event in tipping the
market toward its rapid sell-off.
Regulators have never named the mutual fund that issued the
order, but media reports have identified the firm as Kansas
City-based Waddell & Reed (WDR). Warren declined Thursday to
confirm or deny those reports, saying he found it "abhorrent" that
a client's name was divulged.
The report said an algorithm used by the company to execute a
large sell order of the E-mini Standard & Poor's 500 futures
contract was based solely on the volume in the futures market
"without regard to price or time."
Regulators since have suggested the algorithm that executed the
75,000-contract order didn't completely ignore prices and
quantities.
Warren said Thursday that even if the order was taken out of the
market at the time it went through, there would still be a supply
imbalance of 90%. He also noted that half the order was executed
after the market had begun to rebound, and buyers returned.
-By Jacob Bunge, Dow Jones Newswires; 312 750 4117;
Jacob.bunge@dowjones.com
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