Flash Crash

The May 6th "flash crash" has caused people to question whether the markets have become too computer driven. Ever since, people have blamed a large computer-based trade to have caused a series of other trades, that in total caused the market to drop severely and rebound minutes later. Federal regulators released a report on Friday outlining their findings, including that a large order to sell futures by Waddell & Reed had started the flash crash. Traders at the company used a computer algorithm to sell 75,000 S&P 500 E-Mini futures, betting that the overall market would decline. Although a large amount of contracts, it was not unusual. Earlier in the year, Waddell executed a similar trade, however, the difference is that it took five hours to execute compared to 20 minutes on May 6. Other high-frequency traders started buying and then immediately selling the contracts. Waddell's algorithm increased selling because of the increase in volume, further putting pressure on the markets.