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Futures' role in flash crash in question: sources

By Rachelle Younglai

WASHINGTON (Reuters) - U.S. market regulators are hashing out what role the futures market played in May's flash crash as they work to release by week's end a much-anticipated report on what caused the plunge, sources familiar with the matter said on Monday.

Staff at the Securities and Exchange Commission and Commodity Futures Trading Commission have drafted a preliminary version of the report, which will explain how the Dow Jones industrial average <.DJI> dropped about 700 points before sharply recovering in minutes on May 6.

The final report is "expected to clearly describe what happened," SEC spokesman John Nester said.

Regulators are hoping to release the report by month's end, but it might be delayed, the sources said. The 10 SEC and CFTC commissioners must sign off on the final report.

For five months, regulators have been grappling with half a dozen working hypotheses. They were focused on links between declines in prices of stock index products such as E-mini S&P futures contracts and the severe mismatch in liquidity -- to name a few theories.

Money manager Waddell & Reed Financial Inc <WDR.N> sold a large order of the e-mini futures contracts during the flash crash, according to a document obtained by Reuters [ID:nN14198678]. Waddell said that on May 6, it executed several trading strategies including the use of index futures contracts as part of normal operations.

Sources said on Monday that regulators have yet to agree on final language and that there were still questions on the role of the futures market. The sources requested anonymity because they were not authorized to speak on behalf of the regulators. SEC spokesman Nester had no comment.

Datafeed vendor Nanex LLC has suggested that a surge in quote traffic immediately followed by heavy sales of key securities may have sparked the brief market crash.

Nanex has also suggested that computer algorithms placed and canceled large numbers of rapid-fire stock orders in order to gain an edge during the crash.

The sources repeated on Monday that so-called quote stuffing would not be fingered as the cause of the crash, although regulators are probing the practice.

(Reporting by Rachelle Younglai, additional reporting by Herb Lash; editing by Matthew Lewis)

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