Why the Flash Crash Really Matters

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 day came to be known as the Flash Crash.

How did the Flash Crash happen? The Securities and Exchange Commission (SEC) and

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