Which trading algorithm event caused the 6 May 2010 US “flash crash”?
Answer
A large sell order by Waddell & Reed
A large sell order by Waddell & Reed caused the 6 May 2010 US “flash crash,” according to later investigations.
The Kansas-based investment-management firm used an automated execution algorithm to sell 75,000 E-mini S&P 500 futures contracts. The order was not the only factor, but the algorithm’s pace and the already stressed market helped produce a rapid liquidity imbalance. Prices across equities and futures then moved violently within minutes.
The Dow Jones Industrial Average fell roughly 1,000 points, about 9 percent, before recovering much of the loss. Some individual securities briefly traded at bizarre prices, while automated market makers withdrew or reduced displayed liquidity. The episode demonstrated how interconnected exchanges and high-speed trading systems could amplify a relatively ordinary portfolio transaction.
Investigators did not conclude that a single computer malfunction alone explained the event. The SEC and CFTC described interactions among the large futures sale, high-frequency trading, and fragmented market structure. The crash prompted circuit breakers and other reforms designed to slow trading during extreme short-term volatility.