The recently released flash-crash report, jointly written by the staff of the CFTC and Securities and Exchange Commission, pointed to a large trade made by mutual-fund company Waddell & Reed Financial Inc. as a trigger for the market plunge that day. The report didn't cite Waddell by name, but said an algorithm the company used to execute a large sell order of the E-mini Standard & Poor's 500 futures contract was based solely on the volume in the futures market "without regard to price or time." The report said volume that day wasn't a good indicator of market liquidity.
The sell order of 75,000 contracts prompted a selloff and set off a chain reaction, the report said. Waddell has said it doesn't intend to "disrupt" the market through its trading.
Data firm Nanex LLC has since questioned regulators' finding, suggesting Waddell's algorithm actually did factor in price because data show a slowdown in selling by Waddell during the market's steepest decline.
CFTC Economist Andrei Kirilenko on Tuesday left open the possibility that the algorithm didn't completely ignore prices.
The staff is "not aware of any specific price limit that was built into the algorithm," he told CFTC Chairman Gary Gensler. But just because there wasn't a price limit didn't mean the algorithm didn't "take into account prices and quantities," he added.
Still, Mr. Kirilenko and CFTC Commissioner Bart Chilton said the CFTC used the best possible data to draw its conclusions—including raw data that outside firms don't have access to such as audit trails, trader identities and end-of-day position details.
"We are not guessing anything," Mr. Kirilenko said.
CFTC staff indicated the agency is studying the May 6 events to see if they can be dealt with under the agency's new powers to police disruptive trading. The CFTC sought these powers from Congress well before the flash crash, but the incident has prompted them to look at the issue through a fresh lens.
Mr. Pease, the CFTC lawyer, said the agency is looking to see if automated algorithms are "inherently disruptive" and if market players should have certain responsibilities in how they execute these orders.
CFTC Commissioner Scott O'Malia said he doesn't think the use of the algorithm by the large trader on May 6 would be considered disruptive trading under the new law.
Mr. Pease also said the CFTC is looking to see if quote stuffing should be covered in the new rules. Quote stuffing is a practice in which the market is flooded with a large number of orders that are quickly canceled.
source : http://online.wsj.com/article/SB10001424052748703440004575548490476816252.html
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