SEC Report on May 6th Flash Crash

A report by the SEC (Securities and Exchange Commission) indicated that the May 6th Flash Crash was caused by a large, automated trade by one company during a time when the market was already under stress.  Although the SEC report does not name the company, other media has  identified the company as Waddell & Reed Financial Inc. of Overland, Kan.  Waddell was using an algorhythm to automate the sale of 7500 E-Mini contracts (about $4.1 billion).  USA Today’s 10/1/10 article states that the trade happened “extremely rapidly” which then in turn led to liquidity crises.  According to Financial Planning magazine, “algorhythms can take into account time, price and volume. The one the trader chose from a pull-down menu just took volume into account. When trading systems paused due to the unusually high-volume trade, sellers whose orders were in process found there were no buyers at the other end. Their holdings sold for pennies and panic ensued.” (Algorithm Set Off Flash Crash: SEC)