Why the Flash Crash Really Matters – Issue 23: Dominoes

At about 2:30pm on May 6, 2010, an asset management firm began executing a series of orders on the Chicago Mercantile Exchange. Located in Overland Park, Kansas, Waddell & Reed was (and is) one of the oldest mutual fund companies in America. It followed a strategy based on fundamental analysis—Wall Street code for old-fashioned investing. That afternoon, it wanted to sell 75,000 futures contracts on the S&P 500, a major market index, before the market closed at 4 p.m. The order was large but basically unremarkable, and Waddell & Reed had been executing similar trades for decades.

But this time something was different. Within 20 minutes of Waddell & Reed’s initial order, S&P 500 futures had declined 5 percent, and individual equity prices began to oscillate wildly. The price of the consulting firm Accenture declined from roughly $30 to $0.01 in seven seconds. Consumer goods giant Procter and Gamble dropped from around $60 to $39. Shares of Apple tumbled 20 percent from their pre-crash price of approximately $250, and also traded at nearly $100,000 per share (trades which were later annulled by the exchange). The dramatic futures move and the massive and sudden dislocation in the equities markets on that…

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