Mind boggling how a single automated sale of $4.1 billion in futures contracts could trigger the Flash Crash of 5/6/10.  The SEC and CFTC joint report captured the sequence of events.  Here's how The NYTimes neatly summed up the details provided by the regulators:

It began with the sale by Waddell & Reed of 75,000 E-Mini Standard & Poor’s 500 futures contracts, using computer sell algorithms.  Normally, a sale of this size would take place over as many as 5 hours, but the large sale was executed in 20 minutes.  

The algorithm was programmed to execute the trade “without regard to price or time,” which meant that it continued to sell even as prices dropped sharply.

The algorithm is one used widely across markets. It was provided to the firm by Barclays Capital, but it was up to Waddell & Reed to set the parameters dictating the way it sold the futures contracts.

There was no explanation from officials why the firm chose to sell so many contracts all at once, except to speculate that it was already late in the trading day when it made the sale.  Neither would officials explicitly say whether or not the firm was under investigation, but they pointed out that the firm had made similar trades in the past.

In response to Friday’s report, Waddell & Reed put out a statement it had already issued in May.  It said it had sold the contracts because it was worried about the European crisis spreading to United States.

After the firm started to sell, the report found, many of the contracts were bought by high-frequency traders, computerized traders who buy and sell at high speed and account for a big part of trading in today’s markets.

As they detected that they had amassed excessive “long” positions, they began to sell aggressively, which caused the mutual fund’s algorithm in turn to accelerate its selling.

Startlingly, as the computers of the high-frequency traders traded contracts back and forth, a “hot potato” effect was created, as contracts changed hands 27,000 times in 14 seconds, but with eventually only 200 actually being bought or sold.

The selling pressure was then transferred from the futures markets to the stock market by arbitrageurs who started to buy the cheap futures contracts but sell cash shares on markets like the NYSE. 

Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling.  Altogether, this led to the abrupt drop in prices of individual stocks and other financial instruments like ETF's, and caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000.

The rout continued until an automatic stabilizer on the futures exchange cut in and paused trading for 5 seconds, after which the markets recovered.

For the complete story, click onto:   [ NYTimes, "Lone $4.1 Billion Sale ...," 10/1 ]