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Saturday, October 2, 2010

CME Group Disses the SEC 104 page Flash Crash Fairy Tale

CHICAGO, Oct. 1 /PRNewswire/ -- CME Group supports the work of the Commodity Futures Trading Commission, the Securities and Exchange Commission and the Joint Committee on Emerging Regulatory Issues concerning the events of May 6, 2010. As the report details, fundamentally negative financial, economic and political events in Europe and elsewhere contributed to investor uncertainty and impacted participation and liquidity in all market segments at certain times that day.

Throughout the day on May 6, CME Group markets functioned properly. Our automated credit controls, order quantity limitations, stop and market order price protection points, price banding procedures, and stop logic functionality operated as designed and were effective in responding to challenging market conditions.

Futures and options markets are hedging and risk transfer markets.  The report references a series of bona fide hedging transactions, totaling 75,000 contracts, entered into by an institutional asset manager to hedge a portion of the risk in its $75 billion investment portfolio in response to global economic events and the fundamentally deteriorating market conditions that day.  The 75,000 contracts represented 1.3% of the total E-Mini volume of 5.7 million contracts on May 6 and less than 9% of the volume during the time period in which the orders were executed. 

The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices.  These hedging orders were entered in relatively small quantities and in a manner designed to dynamically adapt to market liquidity by participating in a target percentage of 9% of the volume executed in the market. 

As a result of the significant volumes traded in the market, the hedge was completed in approximately twenty minutes, with more than half of the participant's volume executed as the market rallied – not as the market declined.  Additionally, the aggregate size of this participant's orders was not known to other market participants.

Additionally, the most precipitous period of market decline in the E-Mini S and P 500 futures on May 6 occurred during the 3½ minute period immediately preceding the market bottom that was established at 13:45:28. During that period, the participant hedging its portfolio represented less than 5% of the total volume of sales in the market. Complete CME Press Release

Zero Hedge Commentary
Now the only question is, when does Waddell and Reed sue Mary Schapiro for slander and defamation, or, if they decide to keep quiet about all these baseless allegations, pehaps some aspiring investigative reporters can uncover how much in taxpayer-funded "damages" the SEC may have awarded the Kansas firm in advance of the report publication.

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