Curriculum·Graduate·G904
Execution Algorithms
Waddell and Reed and the Flash Crash, 6 May 2010.1 billion dollars of stock-index futures to hedge a position, and the algorithm was set to target a fixed percentage of trading volume with no limit on price and no limit on time.
Lesson 1 opens on
Waddell and Reed and the Flash Crash, 6 May 2010
1 billion dollars of stock-index futures to hedge a position, and the algorithm was configured to target a fixed percentage of trading volume, around nine percent, with no limit on price and no limit on time. In an already-nervous and thinning market the algorithm kept selling in proportion to volume, and as volume rose, much of it high-frequency traders passing the same contracts back and forth, it fed orders in faster even though the market had not absorbed the ones already sent, selling all 75,000 E-mini contracts in 20 minutes where an earlier program of the same size had taken more than five hours. The joint SEC and CFTC staff report put this sell program at the start of the chain that became the Flash Crash, in which major indices, already down over 4 percent on the day, plunged a further 5 to 6 percent in minutes and then largely recovered.
The lessons
- G904-01An execution algorithm needs price and time limitsExplain that an execution algorithm without price and time limits will chase a falling marketabout 34 min · opens on Waddell and Reed and the Flash Crash, 6 May 2010
- G904-02Executing into thin liquidityExplain that the same order size has far more impact when liquidity is thinabout 34 min · opens on The sterling flash crash, 7 October 2016
- G904-03The erroneous order sent to the marketExplain that pre-trade controls exist to stop a system from sending orders it never shouldabout 34 min · opens on The Goldman Sachs options error, 20 August 2013
- G904-04Spoofing: the orders you never meant to fillExplain that placing orders you intend to cancel to move the price is illegal spoofingabout 34 min · opens on Panther Energy Trading and Michael Coscia, 2011