Many of us have read the long awaited joint SEC-CFTC report on the May 6th Flash Crash. By now everyone knows, that the regulators largely blame the sudden Flash Crash on a huge sale of E-mini futures contracts by a single fundamental investor, not named in the report, but which sources have identified as Waddell & Reed Financial, a conservative mutual fund company.

Many of us have read the long awaited joint SEC-CFTC report on the May 6th Flash Crash. By now everyone knows, that the regulators largely blame the sudden Flash Crash on a huge sale of E-mini futures contracts by a single fundamental investor, not named in the report, but which sources have identified as Waddell & Reed Financial, a conservative mutual fund company.

The firm was selling off 75,000 E-mini contracts (valued at $4.1 billion) to offset the risk of an existing equities portfolio. The problem was that the sale of $4.1 billion of E-minis set off a chain of events that caused the Dow Jones industrial to plummet 600 points within minutes.

In terms of lessons learned from, it points out the perils of algorithmic trading strategy run amok when it is executed without regard to time and price.

This large fundamental seller chose to execute this sell program via an automated execution algorithm (sell algorithm) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9 percent of the trading volume calculated over the previous minute, but without regard to price or time, states the report.

But several pundits and analysts have issued comments that are critical of the SECs report and feel it doesnt go far enough.

It wasnt just the E-Mini. They made it clear the SPY (exchange traded fund) was part of it, commented Herb Greenburg, a reporter for CNBC who has been focusing on ETFs for several weeks. Greenburg said the SPY was part of the broader equation.

In a CNBC interview with former SEC Chairman Harvey Pitt, founder of Kalorama Partners, Bob Pisani who spoke with traders to get their reaction to the report, said I hear that 75,000 E-Mini contracts was not that big given the amount thats traded.

Also, the report implicated the SPY an ETF that is based on the S&P 500 index stocks.

Some of the conclusions reached are somewhat obvious to us, said Pitt. The markets are interrelated between derivatives and securities. I think we already knew that. And that data was important to the efficacy of the markets, said the former regulator. Pitt seemed very concerned about the quality of market data emanating from the exchanges. We have a market structure in which every market centers treats its market data as proprietary.

In fact, CNBC journalists said they were not satisfied by the report and didnt buy the regulators emphasis on the E-Mini sales.

There were concerns about market structure, particularly about Reg NMS and its offshoots, the lack of circuit breakers and the latency of the tape. As the tape slowed down traders slowed down and traders stopped trading. This goes to market structure issues and not to an E-Mini sale, contended Pisani.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad. View Full Bio