(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
(For a look at the Nanex report, see:
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
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
Both Waddell and the CFTC declined comment on the Nanex