NEW YORK, Oct 22 (Reuters) - Regulators met last week with Barclays Capital Inc to discuss the brokerage's execution of a trade that was portrayed as a trigger for the "flash crash" that roiled U.S. stock markets in May, a source with knowledge of the meeting said on Friday.
The workings of an algorithm that executed 75,000 futures contracts on May 6 for money manager Waddell & Reed Financial Inc (WDR.N) was a topic of discussion, according to the source.
Regulators in a report three weeks ago said the trade, worth $4.1 billion, set off liquidity shocks that rocked U.S. futures and stock markets, temporarily wiped out $1 trillion and rattled investor confidence in U.S. capital markets.
The algorithm that executed the trade has been harshly criticized by high-frequency traders who have said it was substandard because it purportedly only took trading volume into account, as indicated in a regulatory report on Sept. 30.
Regulators have never named Waddell, but the Overland Park, Kansas firm has been identified as the name behind the trade.
"Waddell Stupidity Caused Crash," wrote Dave Cummings, founder and chairman of trading firm Tradebot Systems Inc, in an widely circulated email earlier this month.
But the source said officials from Barclays told the CFTC that the algorithm functioned properly and took into account price and time, factors that have been cited as flaws in the computer code's construction.
"In effect what that algorithm does is it's a price momentum. So if the market is moving dramatically in the direction against it, it will shut off," the source said.
The CFTC did not inquire about how the algorithm works until after its joint report with the Securities and Exchange Commission on the May 6 crash came out, the source said.
CFTC Chairman Gary Gensler and 10 CFTC staff met with four Barclays' officials and a lawyer from law firm Winston & Strawn LLP on Oct. 14 at the commission's office in Washington, according to the CFTC's website said.
The meeting was about the Dodd-Frank Act. It also included a discussion of how algorithms work and issues related to swap contracts, including clearing, execution facilities and data storage.
CFTC spokesman Scott Schneider declined to comment.
Barclays, Waddell & Reed and Winston & Strawn also declined to comment.
While the algorithm has been widely panned, Waddell's "orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices," said CME Group Inc (CME.O), parent of the exchange where the trade took place, in a statement on Oct. 1.
CME Group did not name Waddell. (Reporting by Herbert Lash; Editing by Kenneth Barry)