In the course of researching another issue, we reread
transcripts of SEC/CFTC meetings that took place in the
months after the flash crash.
But this time, we read those transcripts with the gift
of hindsight, having gained considerable knowledge from
extensive analysis of market data,
analysis of the actual Waddell and Reed (W&R) trading data, speaking
to people directly involved in the trading of those contracts and the algorithm's logic,
as well as talking to regulators and academics directly involved in the
Flash Crash Report and
papers associated with that report.
Several items jumped out from our second reading that we missed the first time through. Within a day of analyzing the behavior of the W&R Algorithm (the algo) from the actual W&R Trades (being the only private firm given this data), we knew something was significantly wrong with the SEC flash crash report. But now, with the benefit of hindsight and this timeline (shown below), we cast a keen eye looking for differences in the regulator's understanding of the algo over the course of meetings spanning 5 months, and noticed new information and backpedaling at the later meetings, especially the 05-Nov-2010 meeting after the regulator finally met with the person in charge of executing the algo they blamed just weeks earlier (read that story).
What stood out the most, was what seemed like a concerted effort to portray High Frequency Trading (HFT) in the best possible light. The contrast is greatest between the first and last committee meetings. We wonder if Gensler's private dinner meeting with top HFT influenced the 05-Nov-2010 meeting, just 4 days later.
Throughout the transcripts, questions revolved around how much and how fast the algo was selling, with scant attention paid to HFT's super aggressive selling of 2000+ contracts immediately through the book at the very start of the flash crash. (see chart at right).
Date (2010) Event 06-May The Flash Crash 18-Jun Nanex Original Flash Crash Findings 22-Jun Joint CFTC-SEC Advisory Committee Meeting (Webcast only - why?) 11-Aug Joint CFTC-SEC Advisory Committee Meeting 27-Sep Nanex Flash Crash Report 01-Oct SEC/CFTC Flash Crash Report 02-Oct Kirilenko: The Flash Crash: The Impact of HFT on an Electronic Market 08-Oct Charts from the actual Waddell & Reed Trading Data 12-Oct Technology Advisory Committee 14-Oct First CFTC meeting with Vijay Pant (headed execution of W&R Contracts) 01-Nov Commissioner Gensler meets with top HFT (revealed at 05-Nov-2010 meeting) 05-Nov Joint CFTC-SEC Advisory Committee Meeting
The dip to -2% at 14:45 is substantial and forms during the period of the largest and fastest price drop. It is substantial because the percentage applies to cumulative volume up to that point: it's as if the algo were programmed to execute only 7% of total volume instead of 9%. After the 5-second halt, the algo sells at it's highest rate and makes up the short-fall. This is when the market is rallying from the low of the day!
Fortunately, Dodd Frank had recently passed, requiring disclosure of this meeting: