Bloomberg News

Eurex Blames Institutional Traders for August DAX Blip

October 19, 2011

(Updates with analyst comment in seventh paragraph.)

Oct. 19 (Bloomberg) -- Mass selling by institutional investors caused the mini-crash that occurred in German DAX Index futures trading in August and not high-frequency trading as initially thought, the derivatives exchange Eurex Frankfurt AG said in a report.

High-frequency traders helped to alleviate the so-called flash crash by absorbing some of the larger orders, providing the market with liquidity, Edward Backes, head of market supervision at Eurex, said in the report e-mailed today. Eurex is jointly operated by Deutsche Boerse AG and SIX Swiss Exchange.

High-frequency trading firms have come under increased regulatory scrutiny following a similar crash in May of last year, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. The companies, which prefer to be called automated proprietary traders, say they benefit all investors by keeping markets liquid and transaction fees low.

“Placing sole responsibility for volatile markets and erratic price movements on high-frequency traders is neither appropriate nor helpful,” Backes said. “Nonetheless, high- frequency trading too can only take place within an appropriate regulatory framework that reasonably balances the benefits and the risks.”

Chain Reaction

DAX Index futures fell more than 4 percent over a 17-minute period in trading on Aug. 25. At the peak, 4,700 contracts changed hands a minute, compared with a monthly average of about 300 a minute, according to Eurex. A chain reaction as seen in the U.S. in May 2010 wouldn’t have been possible in Eurex’s trading, Backes said.

High-frequency traders rely on high-powered computers to execute thousands of orders at high speeds to gain a price advantage over other traders. Regulators around the world, including the U.S. Securities and Exchange Commission, have mulled regulating the industry to reduce market volatility.

“High-frequency trading is not the problem at all, but it gives the market an illusion of liquidity,” said Andreas Lipkow, an equity trader at MWB Fairtrade Wertpapierhandelsbank AG in Frankfurt. “That’s the problem. In stress situations, when the market really needs liquidity, it’s gone.”

The European Union is seeking to impose curbs on high- frequency trading as part of plans to overhaul the region’s financial-market rules.

--Editors: Angela Cullen, James Kraus

To contact the reporters on this story: Cornelius Rahn in Frankfurt at; Julie Cruz in Frankfurt at

To contact the editor responsible for this story: Angela Cullen at

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