Communications of the ACM
Regulators Blame Computer Algorithm for Stock Market 'Flash Crash'
A joint investigation by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission has issued a report calling the May 6 stock market flash crash the responsibility of an automated trade execution system that inundated the Chicago Mercantile Exchange's Globex electronic trading platform with a major sell order that triggered a nearly 1,000-point plunge in the Dow Jones Industrial Average in a half hour.
"[A] large fundamental trader chose to execute this sell program via an automated execution algorithm that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9 percent of the trading volume calculated over the previous minute, but without regard to price or time," the report says. "The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year."
The study found that under strained market conditions, the automated execution of a big sell order can induce extreme price movements, particularly if price is not factored in by the automated execution algorithm. "Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets," the report concludes.
From Computerworld
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