Lone $4.1 Billion Sale Led to 'Flash Crash' in May
By GRAHAM BOWLEY October 1, 2010
It was a stock market mystery that had everyone guessing for months: just what caused that harrowing flash crash last May?
On Friday, after months of investigation and speculation, federal authorities finally provided the answer: it all began with the click of a computer mouse in Kansas.
In a long-awaited report on one of wildest days in Wall Street's history, regulators said that the automated sale of a large block of futures by a mutual fund - not named in the report, but identified by officials as Waddell & Reed Financial, of Overland Park, Kan. - touched off a chain reaction of events on May 6. The Dow Jones industrial average plunged more than 600 points in a matter of minutes that day and then recovered in a blink.
The finger-pointing and speculation that followed - 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.
The regulators hope the report lifts the uncertainty that has hung over the nation's exchanges - and investors' minds - since the crash. Certainly, officials at the Securities and Exchange Commission and the Commodity Futures Trading Commission seemed confident they had established the causes of the crash and answered any final doubts, and the findings were welcomed by some in the markets.
But it also 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.
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