May 6th Flash Crash Cause Identified
The massive “flash crash” that caused a brief panic on Wall Street on May 6th has been explained. Although initial speculation was that the short-lived 1,000 point plunge in the Dow was the result of a bumbling trader, federal regulators have found that it was the result of an enormous sell-off.
A mutual fund, using automated trading software, was responsible for causing the scare when it started selling off futures contracts valued at $4.1 billion, according to an SEC report.
Traders were already stressed by the escalating Greek debt crisis so that the unexpected sell-off frightened investors who quickly pulled their money out of the stock market.
Approximately $1 trillion in market value vanished within just a few minutes.
At the end of the days trading, the market had generally recouped the massive losses. A rapidly spreading rumor claimed that the panic was the result of a trader accidentally pressing a B key instead of an M initiating a Procter and Gamble transaction worth $16 million as $16 billion deal. .
The SEC report said that the brief crisis was the result a single, huge transaction.
The report raises questions about the dangers of working with high-speed electronic trading systems that could result in a rapid financial melt-down.
The specific mutual fund remained unnamed in the SEC report. However, officials have since revealed that it was a Kansas based fund, Waddell & Reed Financial.
