'Flash crash' report: A tale of how not to make a big trade
The May 6 'flash crash' of the stock market was set off by a single $4.1 billion 'sell' order, the SEC reported Friday.
Pablo Martinez Monsivais/AP
The US stock market briefly went haywire on May 6, and a key reason for this so-called "flash crash" was a single large "sell" order, according to a report Friday by the US Securities and Exchange Commission (SEC).
It's a cautionary tale about the complexity and potential vulnerability of America's financial markets. But in the end, it's also a simple lesson for large and small investors alike: If you're going to trade, be careful how you do it.
At the heart of the incident, as the report recounts, was a single poorly designed trade. As a result, many stock prices swung sharply downward just after 2:30 p.m. and then shot upward to recover most of those losses by 3 p.m.
"A customer [investor] has a number of alternatives as to how to execute a large trade," said the report, prepared by the Commodity Futures Trading Commission (CFTC) as well as the SEC. "This large [mutual fund company] chose to execute this sell program via an automated execution algorithm ... without regard to price or time."