A Forensic Reconstruction And Visualization Of The Impact Of Waddell & Reed's "Sell Algo" On The Market
With the SEC hoping to promptly bury its disgraced "findings" on the Flash Crash, and move on to greater and more memorable crashes, it is no surprise that it will be years before anyone hears back from Mary Schapiro's porn addicts on their policy "recommendations" vis-a-vis fixing the second derivative of the Fed's POMO actions known as the market. We can promise the SEC much more will soon be heard on the topic of Waddell & Reed's involvement, but for the time being, courtesy of Nanex, we would like to provide all those who refuse to buy the SEC's scapegoating campaign of W&R's "sell algo" with definitive confirmation of just how little impact this evil, rogue "sell algo" had on the overall market in one pretty visual.
The first chart below shows the price of the eMini futures contract
(ES.M10) along with cumulative (sum) up and down tick contract volume
beginning at 14:32 on a one second interval. In the eMini, cumulative
up/down tick contract volume is an excellent proxy for Buy/Sell volume.
The second chart shows the up (green) and down (red) tick contract
volume plotted separately.
Starting with the last paragraph at the bottom of page 15 of the SEC report:
Between 2:32 p.m. and 2:45 p.m., as prices of the E-Mini
rapidly declined, the Sell Algorithm sold about 35,000 E-Mini contracts
(valued at approximately $1.9 billion) of the 75,000 intended. During
the same time, all Fundamental Sellers combined sold more than 80,000
contracts net, while all Fundamental Buyers bought only about 50,000
contracts net, for a net fundamental imbalance of 30,000 contracts. This
level of net selling by Fundamental Sellers is about 15 times larger
compared to the same 13-minute interval during the previous three days,
while this level of net buying by the Fundamental Buyers is about 10
times larger compared to the same time period during the previous three
Summarizing the above: between 14:42 and 14:45, the Sell Algorithm sold
35,000 contracts and other Fundamental Sellers sold 30,000 contracts for
a total of 65,000 short. The chart below shows the cumulative up/down
volume at 14:45 is approximately -60,000 contracts -- only a 5,000
And now pay attention here:
From page 14 of the SEC Report:
This large Fundamental Seller chose to execute this sell
program via an automated execution algorithm (“Sell Algorithm”) that
was programmed to feed orders into the June 2010 E-Mini market to target
an execution rate set to 9% of the trading volume calculated over the
previous minute, but without regard to price or time.
The two charts below shows the price of the eMini ES.M10 future and the
contract volume at a one-second interval. The contract volume is split
into two components: 91% (black) and 9% (light blue) illustrating the
relationship between the Sell Algorithm trading volume (blue) and the rest of
the market (black). Since we do not have access to individual trade reports made
by the Sell Algorithm, we can only show a simple percentage per
interval. It may be possible with some effort, to estimate more accurate
values. Nonetheless, the purpose of these charts, is to bring
perspective of the size of Sell Algorithm's trading volume.
And there you have it: W&R's algo impact visualized based on a heuristical algo. In other words, according to the SEC, it is that barely visible blue wiggle that was responsible for a $1 trillion loss in market cap.
As we said, the SEC has not heard the last of this by a long shot.