aiCIO: CFTC Acknowledges Error in Flash Crash Report

Oct 22, 2010, 11:46 ET from Asset International

STAMFORD, Conn., Oct 22. /PRNewswire/ -- According to aiCIO's Joe Flood:

There are errors and omissions in the three-week-old joint Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) report on May's flash crash, during which the Dow plunged 600 points in a matter of minutes.

According to the report, a "mutual fund complex" (unnamed, but known to be Kansas-based Waddell & Reed) executed a trade to sell 75,000 E-mini contracts, a Chicago Mercantile Exchange futures contract. Waddell's algorithm proved too simplistic -- piling an increasing number of sales orders onto an already saturated market – and set off a chain of rapid price changes and liquidity evaporation that drove that market into a tailspin.

aiCIO sources say there are problems with this version of events:

  • Waddell & Reed can't directly trade E-minis. As products of the CME, they can only be traded exclusively on that exchange. Waddell & Reed is not a member of the CME. Like most mutual funds, they rely on a "clearing member" of the exchange to route their trades.

  • In fact, contrary to the implication of the SEC-CFTC report, it was Waddell's broker, Barclay's Capital, that executed the trade in question – not Waddell. A CFTC spokesman acknowledged to aiCIO that an executing broker was responsible for handling the trade.

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About aiCIO

A quarterly online publication, aiCIO focuses on the 5,000 largest pools of capital in the world, across pension plans, sovereign wealth funds, endowments, foundations, insurance funds and other leading institutional investors. aiCIO is edited by Kip McDaniel.

About Asset International

Asset International is a privately-held provider of information and technology to global pension funds, asset managers, financial advisers, banking service providers, and other financial institutions in the private and public sector. Its industry-leading brands include Strategic Insight, SIMFUND, PLANSPONSOR, PLANADVISER, Global Custodian, and The Trade. The company was acquired in January 2009 by Austin Ventures and has offices in New York, Hong Kong, London and Stamford, CT.

SOURCE Asset International