(Updates with comment about market complexity)
By Herbert Lash
NEW YORK Oct 8 A second-by-second review of trading at the height of the "flash crash" on the U.S. stock market in May shows it could not have been caused by just one mutual fund's trade, research firm Nanex LLC said on Friday.
In a 104-page report last week, U.S. regulators largely blamed trading in CME S&P500 stock index e-mini futures contracts by a mutual fund, identified by others as Waddell & Reed Financial Inc <WDR.N, for causing the market meltdown.
But research firm Nanex LLC said on Friday that the trades by Waddell occurred after the market had already bottomed.
Lining up the trading of Waddell's 75,000 e-mini contracts with a second-by-second graph of the e-mini market activity refutes the contention by regulators that as the trade was being executed, liquidity dried up, Nanex said.
"They're claiming that liquidity got really, really low," said Nanex founder Eric Hunsader. "The bulk -- the peak of their trades -- all occurred when there supposedly was no liquidity in the market. And what did the market do? It went up." (For a look at the Nanex report, see: here&R.html)
Vlad Khandros, a official who works closely with regulators at Liquidnet Inc, a trading platform for block trading, said understanding market liquidity is difficult.
A proposed audit trail and large trade identification system should help regulators to better analyze the market, he said. In addition, firms that step forward with ideas and views on market structure are encouraging, he said.
However, "it can be dangerous to base decisions off of a small set of data points," Khandros noted. "Until more data is more accessible, we will continue to have a host of theories and concerns that may or may not be in touch with reality."
Nanex said the Waddell order was made up of 6,438 trades from 2:32 p.m. to 2:52 p.m. Eastern time, during the worst of the market's plunge on May 6. During that timeframe, there were 147,577 orders to trade 844,513 contracts in the e-mini futures market, it said.
The May 6 crash caused questions to be asked about the impact of so-called high-frequency traders, who used algorithms to buy and sell stocks very quickly.
High-frequency traders complained that they were unduly blamed for causing the intraday slump in stock prices on May 6. Many expressed relief that Waddell, a mutual fund company based in Overland Park, Kansas, was held responsible for the crash in last week's report by U.S. regulators.
Waddell's trade was first mentioned in congressional testimony days after the crash.
Regulators, including Commodity Futures Exchange Commission Chairman Gary Gensler, have never named Waddell. Reuters identified Waddell as the firm that sold the 75,000 e-minis, citing internal documents prepared by exchange operator CME Group Inc (CME.O).
The CFTC and Securities and Exchange Commission in their joint report last week identified flaws in the Waddell algorithm that executed its trade on May 6, claiming that it did not take enough account of price or volume when executing its trades.
Coupled with the "aggressive" reaction by high-frequency traders, there were two separate "liquidity crises" -- one in the e-mini market, and the other among individual stocks, the report said.
Both Waddell and the CFTC declined comment on the Nanex report.