“The flash crash was a liquidity event, unsupported by the prevailing market structure,” she said. On May 6, as rioting broke out in Athens over the Greek parliament’s approval of austerity measures to avert defaulting on its sovereign debt, markets were already trending downward. At 2.32pm on the US east coast, a mutual funds manager used a trading algorithm to sell 75,000 E-mini futures from options vendor CME Group at 9 per cent of volume to hedge a position. Then, at 2.40 pm, prices began diving rapidly until 2.45pm, when the CME Stop Logic tool paused trading of the E-minis for five seconds. At this time, 35,000 contracts of the 75,000 had been executed. By the time trading in the E-minis resumed, liquidity had recovered, prices stabilised and the remaining 40,000 contracts were executed in a relatively orderly fashion. Both buy- and sell-side liquidity in stocks dramatically declined, starting at about 2.40pm as traders stepped away. Based on Instinet’s research, Crosthwait said pinning the only cause of the “flash crash” on a single order is not “satisfying”.
While the CME Group E-mini futures order could be considered large, it was not unduly so given that the average volume in E-mini futures exceeds 1 million contracts per day. Using the 9 per cent participation rate sited by the report, the “large fundamental seller” would only be selling 12,600 contracts against the 140,000 traded by high frequency traders between 2.41 and 2.44pm. Crosthwait says that, given the facts stated by both the SEC report and the CME Group, the sell order could not be the singular cause of the crash. While Instinet does not think that the initial E-mini order should be attributed as the singular force creating the sell-off, it is worth noting that the first “lesson” cited by the report could be read as a warning against using algorithms that send orders based only on volume without price controls. An algorithm that adjusts its aggressiveness based on price level and/or has a price limit provides an important layer of intelligence and protection, Crosthwait said.