UPDATE: CME: Algorithm At Center Of 'Flash Crash' Worked Properly

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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