HFT and the May 6 flash crash

On May 6th 2010, the US markets were thrown into a frenzy as equity prices rocked and rolled from $43 to a cent for Accenture and from $250 to $99,999.99 for Apple.

After almost five months of investigations, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint report titled "Findings Regarding the Market Events of May 6,2010" on the flash crash dated Sept 30.

The SEC reported: "During the 20 minute period between 2:40 p.m. and 3:00 p.m., over 20,000 trades (many based on retail-customer orders) across more than 300 separate securities, including many ETFs, were executed at prices 60% or more away from their 2:40 p.m. prices." What was happening and what caused this massacre of the markets? Everyone initially thought it was cyberattack or the fault of the algorithms of High Frequency Traders (HFT), whose systems control liquidity flows and volumes of staggering proportions. But no! After deep analysis the SEC found that it was actually the fault of a single trade from a large, fundamental money management institution, Waddell & Reed. Does this imply that HFT is flawed, that the turbo-charged technologies are at fault and that regulators are at a loss to manage markets? Equally, and more fundamentally, with OTC Derivatives and other markets under scrutiny, the term "systemically important" is being bandied about more and more frequently. What does systemically important mean and how does this play into HFT?