U.S. regulators said one large trade of S&P 500 E-Mini Futures by a mutual fund firm helped turn an already-turbulent trading session into the May 6 “flash crash,” when the Dow Jones industrial average plummeted about 1,000 points in less than 30 minutes.

In a summary of their much-anticipated report, the Securities and Exchange Commission and the Commodity Futures Trading Commission said the trade set off two waves of rapidly declining liquidity that took out of the market whatever buying interest remained at that time.

A large fundamental trader described as a “mutual fund complex” initiated an algorithmic sell program to sell a total of 75,000 June 2010 E-Mini contracts, valued at about $4.1 billion, as a hedge to an existing equity position, regulators said.

That mutual fund complex placed the electronic sell order focusing only on trading volume; not on price or time. The order was completed in just 20 minutes, the summary said, to target an execution rate set to 9 percent of the trading volume calculated over the previous minute.

As liquidity vanished, the price of the E-Mini dropped by an additional 1.7 percent in just these 15 seconds, to reach its intraday low of 1056. This sudden decline in both price and liquidity may be symptomatic of the fact that prices were moving so fast, fundamental buyers and cross-market arbitrageurs were either unable or unwilling to supply enough buy-side liquidity.

During the flash crash, buy-side market depth in the June  2010 E-Mini contract fell to about $58 million, less than 1 percent of its depth from that morning’s level. The trading day began with images of rioting in Greece fresh on traders’ minds, with that Mediterranean nation’s debt-related issues fueling volatility even before the trade was placed.

Price Collars To Join Circuit Breakers?

The SEC’s report pointed to the likelihood that the pilot circuit breaker rules implemented earlier this year for hundreds of the most widely traded individual stocks and exchange-traded funds would become permanent features of the U.S. market structure.

The circuit breakers halt trading for five minutes whenever the security in question experiences a price swing of 10 percent or more during any given five-minute period. The circuit breakers are currently in effect on a pilot basis through Dec. 10.

The agency is considering the addition of allowing trading to continue within a price “collar” around the last good sale of a security during periods of volatility.

“SEC staff intends to assess whether the current circuit breaker approach could be improved by adopting or incorporating other mechanisms, such as a limit up/limit down procedure that would directly prevent trades outside of specified parameters, while allowing trading to continue within those parameters,” the report stated.

Derivatives In The Cross Hairs

The SEC and the CFTC have also been considering how to address the problems inherent in the increasingly interdependent securities and derivatives markets, with a focus on exchange-traded products, many of which use swaps, futures and other derivative products to achieve their results.

“May 6 was also an important reminder of the inter-connectedness of our derivatives and securities markets, particularly with respect to index products,” the report went on to say.