From the NY Times:
"Startlingly, as the computers of the high-frequency traders traded contracts back and forth, a "hot potato" effect was created, the report said, as contracts changed hands 27,000 times in 14 seconds, but with eventually only 200 actually being bought or sold."
Reaction:
Ok, so Waddell & Reed entered into a trade in the market, selling 75,000 E-Mini S&P futures contracts, using computer sell algorithms provided by Barclays Capital. However, it was up to Waddell & Reed to decide how to sell those contracts. These futures contracts normally would gradually be sold off in the market over a span of 5 hours. In this case, it took 20 minutes.
With that amount of volume in such a time frame, traders faced a wave of selling pressure. That is, the price of the futures dropped, allowing for traders to arbitrage the opportunity to buy such cheap forward contracts and, in return, sell "cash shares" (to quote from the Times) back on the real-time NYSE. This explains the huge drop and the subsequent rise in trading on the Dow Jones.
Consequentially, the result of this error will expand the monitoring desired by the SEC and the establishment of "circuit breakers" on a growing number of stocks. Mary Schapiro is the chairman of the SEC and Gary Gensler is the chairman of the CFTD.
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