Waddell is Mystery Trader in Market Plunge

NEW YORK (Reuters)—A big mystery seller of futures contracts during the market meltdown last week was not a hedge fund or a high frequency trader as many have suspected, but money manager Waddell & Reed Financial Inc., according to a document obtained by Reuters.

Waddell sold on May 6 a large order of e-mini contracts during a 20-minute span in which U.S. equities markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from Chicago Mercantile Exchange parent CME Group Inc. said.

Regulators and exchange officials quickly focused on Waddell’s sale of 75,000 e-mini contracts, which the CME said in the document “superficially appeared to be anomalous activity.”

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said in congressional testimony on Tuesday [May 11] that it had found one sale was responsible for about 9 percent of the volume in e-minis during the sell-off in the U.S. markets.

…

‘Quite a Shock to the Market’

Mr. Gensler said the contracts were sold between 2:32 p.m. and 2:51 p.m., the height of the meltdown.

The market for e-minis on May 6 fell more than 5 percent in a little more than 5 minutes starting at 2:40 p.m.—the height of the crash, the CME said in the document. The e-minis began to recover before stock prices turned higher.

An order the size of the Waddell contract would be a big trade to execute on a normal day, said a trader whose firm is active in the S&P 500 futures market. About 50,000 contracts are typically traded in an hour, the trader said.

“To get rid of 75,000 contracts, that’s a lot of trading even if the market is healthy,” the trader said. “But when suddenly the market changes and there’s not as many bids there to trade with, 75,000 is going to cause quite a shock to the market. That’s an enormous position for anybody, whether it’s a hedge or whether it’s a trade. It’s a big position, no doubt about it.”

The sharp drop in the futures preceded the dive in the broader U.S. equities markets.