Bloomberg News | A mutual fund’s routine effort to hedge against losses helped set off a chain of events that turned an orderly selloff on May 6 into a crash that erased $862 billion in U.S. equity value in less than 20 minutes, according to two people with direct knowledge of regulators’ findings.

Waddell & Reed Financial Inc. sold CME Group Inc.’s E-mini futures on the Standard & Poor’s 500 Index, spooking traders nervous because of the European debt crisis, the Securities and Exchange Commission and Commodity Futures Trading Commission have concluded, according to the people, who declined to be identified because the findings haven’t been released. Their report on the crash, which briefly sent the Dow Jones Industrial Average down 998.50 points, may be released as early as today.

“Every day, markets are capable of handling large trades,” said Lawrence Harris, a finance professor at the University of Southern California in Los Angeles and a former chief economist at the SEC. Any large transaction on May 6 could “have been the unfortunate trade that broke the camel’s back.”

Regulators are facing pressure from investors to explain whether trading rules have failed to keep pace with markets that now handle order executions in millionths of a second. SEC Chairman Mary Schapiro is trying to protect investors in a fragmented U.S. stock market while maintaining liquidity — the ease with which investors can buy and sell shares — on venues dominated by firms that profit from computerized trading.

Differing Rules

A joint SEC-CFTC report on May 18 said the crash may have been exacerbated by trading rules that differed from venue to venue. In June, exchanges implemented circuit breakers that pause trading in more than 1,300 securities during periods of volatility to prevent selling from snowballing. They have also adopted uniform policies for canceling trades and are eliminating stub quotes, or bids and offers to execute at prices far away from the stock’s last sale.

Lawmakers such as Sen. Ted Kaufman, a Democrat from Delaware, have asked if the high-frequency firms that have supplanted specialists and market makers with strategies that transact thousands of shares a second destabilized trading by withdrawing their liquidity when they were needed most.

Schapiro said earlier this month that regulators should examine increased obligations for market makers providing orders to buy and sell stocks. The SEC and CFTC found in their initial report about May 6 that electronic trading firms supplying bids and offers reined in their activity, increasing the “mismatch of liquidity” and potentially exacerbating the decline.