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Waddell trade kickstarted flash crash - report

Traders work on the floor of the New York Stock Exchange, May 7, 2010. A single trade by Waddell & Reed Financial Inc helped spark the cascade of market selling on May 6, said a source familiar with regulators' report on the so-called flash crash. REUTERS/Shannon Stapleton/Files

NEW YORK/WASHINGTON (Reuters) - U.S. regulators have concluded that a single trade by a “large fundamental trader” helped trigger the brief market crash May 6, according to the regulators’ report released on Friday.

Internal exchange documents have identified the trading firm as Waddell & Reed Financial IncWDR.N, but the report authored by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) did not identify it by name.

The so-called flash crash sent the Dow Jones industrial average down some 700 points in minutes, exposing flaws in the electronic marketplace dominated by high-frequency trading.

Trading on that day was turbulent due to concerns over the European debt crisis. Against that backdrop, a “large fundamental trader” initiated a sell program to sell 75,000 E-Mini contracts as a hedge to an existing equity position, according to the 104-page report.

On May 14, Reuters reported that Waddell sold a large order of E-Mini futures contracts during the market plunge, identifying the firm to which CFTC Chairman Gary Gensler had alluded in congressional testimony.

Waddell chose to execute this sell program via an automated execution algorithm, resulting in the largest net change in daily position of any trader in the E-Mini since the beginning of the year, according to the report.

When markets were already under stress May 6, the algorithm executed the sell program “extremely rapidly in just 20 minutes,” regulators said.

The report lays the foundation for a special commission to recommend new rules to avoid a repeat of such a crash.

The SEC and CFTC are drafting nearly 200 rules required by U.S. Wall Street reform legislation.

Reporting by Jonathan Spicer and Rachelle Younglai