SEC, CFTC issue ‘flash crash’ report

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The official report on the May 6 stock market “flash crash” is out Friday, and as expected, it points to computerized selling by a single large investor that cascaded across the markets -- creating a flood of sell orders that potential buyers couldn’t absorb quickly enough.

The result was a liquidity crisis first in Standard & Poor’s 500 stock index futures and then in individual stocks, the joint report from the staffs of the Securities and Exchange Commission and the Commodity Futures Trading Commission says.

The full 104-page report is here.

The large investor isn’t named in the report, but has previously been identified as Waddell & Reed Financial of Overland Park, Kan. The company has said it did not intend to cause market upheaval with its trade.

The Dow Jones industrial average, which had tumbled early on May 6 on global economic worries, then plunged 700 points in a matter of minutes at midday as a selling wave hit. Just as quickly the Dow recouped most of that decline, though it still closed off 347 points for the day.

How to make sure a flash crash can’t happen again? Regulators already have taken one step: recalibrating market “circuit breakers” that halt trading in times of a cascading decline. The pilot program for these new circuit breakers will run until Dec. 10.

The report also mentions the need for “integrity and reliability” in getting accurate market quotes to investors.
“Although we do not believe significant market data delays were the primary factor in causing the events of May 6, our analyses of that day reveal the extent to which the actions of market participants can be influenced by uncertainty about, or delays in, market data,” the report says.

-- Tom Petruno