Bad Computer Software Caused May's 'Flash Crash'

Remember back on May 6th when the Dow dropped around 1,000 points only to bounce back to a mere few hundred point loss? The cause of the so-called "Flash Crash" has finally been identified by the Securities and Exchange Commission. It was a problem with some computer software that automated futures trading. Ben Rooney at CNN/Money reports that some large unnamed investor was using the a program that sold future contracts quickly and in large numbers:

The selling was initially absorbed by "high frequency traders" and other buyers, the report said. But the algorithm responded to an rise in trading volume by increasing the number of E-mini sell orders it was feeding into the market.

"What happened next is best described in terms of two liquidity crises -- one at the broad index level in the E-Mini, the other with respect to individual stocks," the report said.

In other words, the lack of buyers and the rapid selling of E-Mini futures contracts began to affect the underlying stocks and the broader stock indexes.

The the full story at CNN/Money.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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