A few weeks after the Flash Crash, the SEC came to our office.
They wanted to know whether our trading had played a role in it.
For a few minutes that day, some of the largest and most liquid stocks in the world traded at prices that made no sense. Liquidity simply disappeared.
We weren't even registered with the SEC—our structure didn't require it. But regulators were under enormous pressure. Congress wanted answers. One of the questions was: who contributed to the crash?
They pulled the trading records of firms that had been active that day.
For a firm our size, our footprint stood out.
We managed just over $500 million.
But because we traded futures and ran a fully hedged, market-neutral portfolio, our gross exposure was roughly $4 billion—about $2 billion long and $2 billion short.
Our strategy wasn't trying to predict the direction of the market.
It was a relative-value strategy based on mean reversion in equity index spreads.
That day, the S&P 500 was falling much faster than the European equity indexes. As the spread widened, the model kept buying U.S. equity index futures while simultaneously selling European equity index futures.
We remained fully hedged at all times.
To a regulator looking at billions of dollars of futures trading in the middle of the Flash Crash, that activity was worth investigating.
But when they looked closer, they found the opposite of what they expected.
As the market was in free fall…
We weren't selling.
We were buying.
Not because we thought the market had reached a bottom.
The model simply assumed that, eventually, the spread between the U.S. and European markets would revert toward normal.
It had no way of knowing how far that spread would widen first.
The single lowest print in the S&P futures that day was ours.
But catching that low didn't feel like a victory.
It was the moment of our largest intraday drawdown.
Unrealized.
Deeply uncomfortable.
Then the market snapped back.
The spread normalized, our unrealized drawdown turned into one of the most profitable trading days in the firm's history.
The firm they came to investigate turned out to be one of the firms providing liquidity when almost everyone else was trying to get out.
That conversation ended quickly.
Looking back, that day taught me something I still think about.
Everyone stress-tests a strategy on paper.
The real test comes when liquidity disappears.
That's when you find out what your strategy actually does—not what you hoped it would do.