According to a joint report from the staffs of the Securities and Exchange Commission and Commodity Futures Trading Commission, the trader chose to use an algorithm to trade the E-mini futures contract, a contract that mimics trading in the S&P 500 stock index. The computer program executed the trade "extremely rapidly in just 20 minutes," according to the report.The party that started the crash was Waddell & Reed, an old-school financial services shop with no high frequency trading.
The report found that the trades were initially absorbed by high-frequency traders and others in the market, but soon liquidity dried up for that contract and elsewhere.
The trader who worked the order tried to get the market to buy 35,000 SPX Emini futures contracts in 7 minutes. That would be $2 billion, folks. There's no way to do that and avoid market trauma. $2 billion is more than the entire market capitalization of several companies in the S&P 500, such as Eastman Kodak and the New York Times. The market is not set up to exchange equivalent ownership of these companies in a few minutes.
About 2 million of these contracts trade daily (based on the last 20 days of volume). The trading session starts at 430pm and ends at 415pm. The largest single lot size exchanged today was 1,114 contracts at 10:03, followed by 1,069 exchanged at 12:17.
The report implies that certain changes to the market structure would have reduced the effects, and certainly, enforcing a trading break without exception would be one of those measures that would have resulted in less harm done, but really, if someone is going to make this type of trading error, then it's going to be a problem.
UPDATE: Stephen Grocer has a nice summary. The total sell order was 75,000 contracts.
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