SEC Releases Final Flash Crash Report - Waddell And Reed Blamed As Selling Catalyst

Tyler Durden's picture

100+ pages of garbage, and yes, Waddell and Reed, and their destructive hedging trade of 75,000 e-minis is the culprit that apparently set everything off: "At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) [ZH: Waddell and Reed] initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position." Apparently, its was all evil W&R's fault who traded in conjunction with an even more evil VWAP algo: "This large fundamental trader 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. However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes." In other words, there never was, is and never will be any liquidity in the allegedly most liquid market - ES. Good luck to all those who hope to sell the second there is a second flash crash.

And here is the initial mention of HFTs:

HFTs and intermediaries were the likely buyers of the initial batch of orders submitted by the Sell Algorithm, and, as a result, these buyers built up temporary long positions. Specifically, HFTs accumulated a net long position of about 3,300 contracts. However, between 2:41 p.m. and 2:44 p.m., HFTs aggressively sold about 2,000 E-Mini contracts in order to reduce their temporary long positions. At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume. This is consistent with the HFTs’ typical practice of trading a very large number of contracts, but not accumulating an aggregate inventory beyond three to four thousand contracts in either direction. What happened next is best described in terms of two liquidity crises – one at the broad index level in the E-Mini, the other with respect to individual stocks.

Here is the SEC's justification for why HFT-Stop is now a prevalent phenomenon that can occur whenever and wherever the computer participants who account for 70% of the market so desire:

Based on their respective individual risk assessments, some market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets. Some fell back to manual trading but had to limit their focus to only a subset of securities as they were not able to keep up with the nearly ten-fold increase in volume that occurred as prices in many securities rapidly declined.

HFTs in the equity markets, who normally both provide and take liquidity as part of their strategies, traded proportionally more as volume increased, and overall were net sellers in the rapidly declining broad market along with most other participants. Some of these firms continued to trade as the broad indices began to recover and individual securities started to experience severe price dislocations, whereas others reduced or halted trading completely.

In other words, nothing new, and the primary reason for ongoing market instability: HFT's dominance in the market and its  ability to pull all bids whenever desired, will lead to ever more market crashes. Furthermore, HFTs were merely innocent bystanders in an evil ploy concocted by W&R and VWAP algos which incidentally have worked perfectly trilions of times before, but failed on this one occasions.

And yes, it is nobody's fault really. Here is how the SEC completely ignores the Nanex data that showed quote stuffing (wether involuntary or malicious) was a critical component of the crash.

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.

Nevertheless, as discussed in the Executive Summary, the events of May 6 clearly demonstrate the importance of data in today’s world of fully-automated trading strategies and systems. The SEC staff will therefore be working closely with the market centers to help ensure the integrity and reliability of their data processes, especially those that involve the publication of trades and quotes to the consolidated tape. In addition, the SEC staff will be working with the market centers in exploring their members’ trading practices to identify any unintentional or potentially abusive or manipulative conduct that may cause such system delays that inhibit the ability of market participants to engage in a fair and orderly process of price discovery.

There is no point to event comment on the preceding. By that we mean your confidence in stocks should now be back at 10 out of 10. Maybe even 11 out of 10.

Also, there is absolutely no explanation of why there was "buy side interest" to reappear at the very bottom. And yes, confidence is surging back.


We are currently going through the full report below (pdf).

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quasimodo's picture

Phew! Glad they have that problem taken care of.

Pass me the pipe Doc

midtowng's picture

So, no solutions? No changes? Nothing done to reassure retail investors?

euclidean's picture

No need to, there's nothing wrong here. So move along people. Boy am I looking forward to the SPX geting back to 1500 and USD back to $1.00 on the back of some good ol' home grown American honesty. There is no conspiracy that complicit incompetence can't make a false pretense of. Onwards and upwards!

The score so far - Congress 12 Sheeple 0. We'll call this half time.

HFS = high frequency sarcasm <off>


Bam_Man's picture

Waddell and Reed kidnapped the Lindbergh baby.

faustian bargain's picture

I heard that Waddell and Reed demolished the WTC. Also they caused the Eyjafjallajokull eruption.

unwashedmass's picture

busy guys. i thought they took out kennedy.

Apocalicious's picture

Waddell & Reed is responsible for global warming.

Apocalicious's picture

Waddell & Reed got Bush elected.

knukles's picture

And now we find that there really is no Waddell and Reed, but for a shell corporation established at yesteryear's Bilderberg conference and chartered under the auspices of the Council on Foreign Relations.


sgt_doom's picture

Hell, faustian, Waddell and Reed are the very culprits who gave that frigging Icelandic volcano it's screwy name.

(Actually, I speak a bit of Icelandic and managed to pick up a babe in a bar as I was the only guy there who could pronounce it!)

plocequ1's picture

I have a theory. Being that this market is so fake, Maybe the Dow isn't really green. Maybe it's red, But it's showing green. Maybe the index is not real.

Tyler Durden's picture

Amusingly, that is precisely what happened in March 2007 when the Dow saw a delayed reindexation and was really down 600 points instead of just 300. Since you may not have been on a trading desk that day, the panic that ensued the second the latency caught up was a sight to behold.

traderjoe's picture

Your final comment in the story is the money shot. By blaming the Flash Crash on something so simple as a large (but not out-sized) sell order, they've placed it well within the realm of an any day possibility. Hell, it perhaps would have been better if they blamed it on aliens (do they really only mess with nukes?) or a rare solar flare (Art Cashin tracks the planets).

If all it takes to send the Dow down 1,000 points is a 75k e-mini contract sell order, well how many hundreds/thousands of players are capable of that sort of order? What 10% margin (?) - maybe a $500 million commitment? Governments (terrorists?), hedge funds, mutual funds, etc., etc. Anyone could take the market down. Send out an e-mail to all e*trade customers to sell one contract at 10:01 AM on Monday, becomes insta-flash crash. 

Once again, in the attempt to hide the truth they distance themselves from a solution and guarantee the eventual reset will be that much more abrupt. 

Xedus129's picture

If thats true, one could potentially make a TON of money...  Sell, then short the living daylights out of the market and watch the fireworks.

Kayman's picture

Maybe we're all color blind now...

morkov's picture

trading points are the new devaluation??

ZeroPower's picture

"Since you may not have been on a trading desk that day, the panic that ensued the second the latency caught up was a sight to behold."



Bruno the Bear's picture



Just don't do it real, real fast and you are good to go.

MarketTruth's picture

Here is an idea:

GS, JPM and many others trade a large volume of stock at the same time. Think of it like a DOS attack on a website server. Massive shorts and massive longs and if you play it right, then free money for all participants.

Fidel Sarcastro's picture

Gimme a f*cking break!  75,000 contracts was only about 2.5 to 4% of the TOTAL volume before the crash.  Volume was already good in the ES.

-1Delta's picture

I pretty sure i sold 50,000 on the ES two days before the crash- thank god im not being blamed- phew!

HarryWanger's picture

Thank god that's over with. Fire up those algos and let's get this party started again!

frankTHE COIN's picture

Cant right now, the band needs me acapella.

Dixie Normous's picture

I know for a fact it wasn't WDR.


SheepDog-One's picture

Damn you Waddel and Reid damn youuuuuuuuuuuu!!!

medbow's picture

w&r were on the grassy knoll

turds in the punchbowl's picture

yeah and e-minis ≈ boxcutters

Dr. No's picture

No;  W&R are Lee Harvey O.  The second gunman on the grassy knoll was never found - and nobody wanted to find him.

Gwynplaine's picture
Gwynplaine (not verified) Dr. No Oct 1, 2010 2:59 PM

I was reading a summary of this story over on Marketwatch.   The key quote they featured from the SEC report was "There is no smoking gun." 

Well, I feel more than a little cheated.  I expected at least some "magic bullet" theory.

Cecil Rhodes's picture

Who, that little guy? I wouldn't worry about that little guy...

Quinvarius's picture

An underlying problem to our new system is that 12-15 people have all the US wealth concentrated beneath them.  They didn't earn it.  They stole it.  But, they can't make a move without bring down a company, a market, or even a country.  JPM's coal trades and silver trades are a prime example.  They don't even understand how huge they are.  When they get involved in a market, they end up wearing it around like raccoon with its' head stuck in a peanut butter jar.

MsCreant's picture

Add in that they set the computers on auto pilot so they can go out and play.

Kayman's picture

Behind every great fortune is a great time...

chinaboy's picture

Waddell and Reed certainly is NOT responsible for mini crashes we have experienced on daily basis.

If the SEC assigns the blame wrong, it helps the real culprit under the cover and keep causing problems.

Alex Ljungberg's picture

This is just a diversion.

I don't think it's a coincidence that Sanders agreed to a watered down version of the Audit the Fed bill on that same day:

The Fed or its operatives sent a message that they did want to be messed with.

Why hasn't this connection been investigated thoroughly?

What did "Deep Throat" say during the investigation into Watergate: "Follow the money?"

Where are Woodward and Bernstein when we need them?


Milton Waddams's picture

Shhhhh... don't tell anyone that when agenda (asset re-inflation) takes precedent over price discovery you get wild volatility, especially when the former steps aside to determine if it is all clear to return to the latter. Fixed market versus free market. The ruse of the machines.

Buttcathead's picture

I aint buy'n Nuttin.  It's all fake.

mule65's picture

I was never real.  Ever.

Bearsharktopus's picture

Kahnnnnnnnnnnnnnnnnnnnnnnnnnnn....... oops I mean Waddel and Reidddddddddd

cswjr's picture

How cathartic.  I was beginning to doubt our shadowy overlords, but now my full faith [and credit] has been reinvigorated.

Fidel Sarcastro's picture

Is this for real? "At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume."

140k is not even close to 33% of the total daily trading volume.  These people are idiots.