It contains no conclusions, yet draws conclusive statements on what it think shappened. "[SEC]The Commissions have expressed no view regarding the analysis, findings or conclusions contained herein."
CME - a market provider of the E-mini S&P contracts that are said (by SEC and others) to be responsible for the precipitous fall caused by a single participant. CME have responded as follows - CME Group Statement on the Joint CFTC/SEC Report - here (pdf) "[CME] Futures and options markets are hedging and risk transfer markets. The report references a series of bona fide hedging transactions, totaling 75,000 contracts, entered into by an institutional asset manager to hedge a portion of the risk in its $75 billion investment portfolio in response to global economic events and the fundamentally deteriorating market conditions that day. The 75,000 contracts represented 1.3% of the total E-Mini volume of 5.7 million contracts on May 6 and less than 9% of the volume during the time period in which the orders were executed. The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices."
Again - The prevailing market sentiment was evident well before these orders were placed
But first - read up on what an E-mini is (via Wiki) E-Mini S&P, often abbreviated to "E-mini" and designated by the commodity ticker symbol ES, is a stock market indexfutures contract traded on the Chicago Mercantile Exchange's Globex electronic trading platform. The notional value of one contract is US$50 times the value of the S&P 500 stock index. It was introduced by the CME on September 9th, 1997, after the value of the existing S&P contract .... The E-Mini quickly became the most popular equity index futures contract in the world.
An alternative opinion This is common rudimentary knowledge of one very general and very possible trading strategy that would not be considered aggressive, but defensive.
1.The purported trader of large Emini short position is said to be Waddell & Reed. Look these guys up and send them a huge sincere congratulations for picking this event and trading it live.
If you are large open long something (anything), that is then subject to a selloff not by your doing, you have serveral very legitimate choices, including (but not limited to) - (a) force close all/parts of your position(s) to preserve profit in the belief it is going down lower, and a top is in (b) trailing stop close the positions on automatic preset limits (c) open a covering short position to 'scalp', increasing your colateral requirements, drawing down your account.
(d) opening more long positions at reduced prices - all 4 of these can be done similutaneously depending on the available collateral.
If (c) is what W&R did, there is nothing whatsoever wrong.
2. This SEC report serves no enduring purpose in explaining how and why a precipitous fall in the market occured over many selected equity securities. It does not examine what should be essential correlating markets that 'should' (but won't) corroborate the SEC statement that "What Happened? May 6 started as an unusually turbulent day for the markets. As discussed in more detail in the Preliminary Report, trading in the U.S opened to unsettling political and economic news from overseas concerning the European debt crisis."
Look at the EU,EC currency pairs and gold. Then look at the AJ, UJ and EJ currency pairs - then stop flogging a [moderated] dead horse! Since 06May, the EURO has rallied up almost 10% - so these concerns were as insubstantiated then, as they are now.
If this was an event brought on by European worries, you might be forgiven for thinking the EURO fell out of favour across the board. But it did not. The 6May flash crash was however a YEN currency event, and limited only to equities.
3. The following SEC statement "Over 20,000 trades across more than 300 securities were executed at prices more than 60% away from their values just moments before. Moreover, many of these trades were executed at prices of a penny or less, or as high as $100,000, before prices of those securities returned to their pre-crash levels." ... goes otherwise completely unanswered.
They assign the cause of - "What happened next is best described in terms of two liquidity crises one at the broad index level in the E-Mini, the other with respect to individual stocks." .... due to what was actually a normal reactive/response action by only one participant.
How bizarre if not completely obsurd to think that cumulative trade amounting to $4.5Billion cascades into $850B wiping off the equity market in the space of 15minutes. If this were the case, then the equity market is entirely in the hands of maniacs every single day.
"[DES&Co] First, we want to emphasize that financial market trading does not take place in a vacuum. The day of May 6th began dramatically, with enormous volatility experienced in interest rate and currency markets as the world watched Europe?s credit troubles unfold, dramatized by the riots in the streets of Athens on every trading floor?s TV screens, well before and seemingly far removed from later dislocations in the U.S. equity markets. These events called into question the global economic recovery and exacerbated the skittishness of markets against the backdrop of heated Congressional debates on a new regulatory landscape. Remembering this context is important, as we believe the volatile macro-economic environment enabled rational actors to view the beginning of the drop as part of a legitimate, large market correction, particularly following the run-up in the U.S. equity markets over several months."
... and ... "Through the afternoon trading volumes grew and price and execution data feeds from some venues began to get delayed. At the same time trading was slowed at the NYSE. As a result, liquidity supply at that venue became largely unavailable, while liquidity demanders simply flooded alternate venues, leading to a temporary but systematic supply/demand imbalance. The combination of delayed and unreliable quote and execution data combined with inconsistent policies at different trading venues and an ecosystem that includes market orders, stop loss orders and other order types resulted in rather perverse dynamics in the limit order books of a number of stocks and ETFs, including quotes and executions at unrealistic prices."
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In short - this report does little in explaining anything but an ineptitude and lack of understanding of other plausible and more maligned market operations. It is one sided and short sighted. It appears to have been written as a result of a Q&A interview session of predetermination, rather than as a result of any consultative and thorough investigation of timelined events.
A toothless tiger with no claws indeed.
But wait ... there is sure to be more. But nothing will change in the mean time, so be careful out there.
