Sudden Dow Plunge Linked to Kan. Mutual Fund
Shares of money manager Waddell & Reed Financial Inc. fell Friday as it was identified as the stock trader that sold off a large number of index futures contracts during last Thursday's market collapse.
The company's stock fell $1.81, or 5 percent, to $32.25, on a day when broader markets fell nearly 2 percent.
Waddell's sale of 75,000 e-mini futures contracts in a 20-minute span on May 6 drew the attention of regulators, Thomson Reuters reported.
E-minis are tied to the value of the S&P 500 index. They're traded electronically on the Chicago Mercantile Exchange.
Overland Park, Kan.-based Waddell & Reed, which provides mutual funds and asset management services, said its trading of e-mini contracts was part of its normal operation to protect fund investors from market risk.
"The portfolio managers in those flexible portfolio funds often make hedging trades to attempt to protect shareholders from downside risk. And that's what was happening in that case," spokesman Roger Hoadley said.
Waddell & Reed said it was one of more than 250 companies that traded e-mini securities as the stock market plunged. The Dow Jones industrials lost nearly 1,000 points, nearly a tenth of their value in less than half an hour.
(Scroll down to see a graphic of how that day went on Wall Street)
It was the biggest drop ever in a trading day. The Dow recovered two-thirds of the loss before the closing bell, but the free fall prompted close scrutiny of that day's trading as regulators try to figure out what caused the sell-off.
More Market Plunge Coverage
Dow's Dive Sparks Federal Investigation
Making Sense Of One Crazy Day
Stocks Falter after Wild Day, Europe Woes Linger
SEC Chairman Mary Schapiro said Tuesday in testimony before the House Financial Services subcommittee on capital markets that her agency has yet to pinpoint the reason for the sell-off.
Six major U.S. securities exchanges on Monday agreed in principle to a uniform system of "circuit breakers," which could slow trading during sharp market swings. Most of the 50 U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.
Schapiro and her fellow SEC commissioners will review the recommendations submitted by the exchanges for a marketwide system of circuit breakers, SEC spokesman John Nester said after the hearing.
Once the market started falling, automated computer trading intensified the downturn. The selling only led to more selling as prices plummeted and traders tried to limit their losses.
Waddell & Reed said it, like many other traders, was affected negatively by the market activity of May 6.
The CME and regulators at the Commodity Futures Trading Commission declined to comment on Friday.
In congressional testimony this week Schapiro and Gary Gensler, head of the CFTC, said e-mini contract trading was believed to have lead to steep stock price declines.
Gensler testified that one trader took a large short position in the e-mini, selling "on the way down and (continuing) to do so even as the price level recovered." He didn't name the trader.
Waddell's spokesman said the company has not been contacted by regulators or the CME about the May 6 trading.
AP The company's stock fell $1.81, or 5 percent, to $32.25, on a day when broader markets fell nearly 2 percent.
Waddell's sale of 75,000 e-mini futures contracts in a 20-minute span on May 6 drew the attention of regulators, Thomson Reuters reported.
E-minis are tied to the value of the S&P 500 index. They're traded electronically on the Chicago Mercantile Exchange.
Overland Park, Kan.-based Waddell & Reed, which provides mutual funds and asset management services, said its trading of e-mini contracts was part of its normal operation to protect fund investors from market risk.
"The portfolio managers in those flexible portfolio funds often make hedging trades to attempt to protect shareholders from downside risk. And that's what was happening in that case," spokesman Roger Hoadley said.
Waddell & Reed said it was one of more than 250 companies that traded e-mini securities as the stock market plunged. The Dow Jones industrials lost nearly 1,000 points, nearly a tenth of their value in less than half an hour.
(Scroll down to see a graphic of how that day went on Wall Street)
It was the biggest drop ever in a trading day. The Dow recovered two-thirds of the loss before the closing bell, but the free fall prompted close scrutiny of that day's trading as regulators try to figure out what caused the sell-off.
More Market Plunge Coverage
Dow's Dive Sparks Federal Investigation
Making Sense Of One Crazy Day
Stocks Falter after Wild Day, Europe Woes Linger
SEC Chairman Mary Schapiro said Tuesday in testimony before the House Financial Services subcommittee on capital markets that her agency has yet to pinpoint the reason for the sell-off.
Six major U.S. securities exchanges on Monday agreed in principle to a uniform system of "circuit breakers," which could slow trading during sharp market swings. Most of the 50 U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.
Schapiro and her fellow SEC commissioners will review the recommendations submitted by the exchanges for a marketwide system of circuit breakers, SEC spokesman John Nester said after the hearing.
Once the market started falling, automated computer trading intensified the downturn. The selling only led to more selling as prices plummeted and traders tried to limit their losses.
(CBS)
Waddell & Reed said it, like many other traders, was affected negatively by the market activity of May 6.
The CME and regulators at the Commodity Futures Trading Commission declined to comment on Friday.
In congressional testimony this week Schapiro and Gary Gensler, head of the CFTC, said e-mini contract trading was believed to have lead to steep stock price declines.
Gensler testified that one trader took a large short position in the e-mini, selling "on the way down and (continuing) to do so even as the price level recovered." He didn't name the trader.
Waddell's spokesman said the company has not been contacted by regulators or the CME about the May 6 trading.
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tmittelstaed said, "... what happened was that traders who panicked and sold off lost money, and traders who kept cool and bought at the bottom (which pushed up the price) ended up making a mint. In other words, the market punished those responsible for the sell-off.
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The market punished nobody. Despite your animistic belilef in Adam's Smith's "invisible hand" (or is it "black box"), the market is not a consistently predictable taskmaster, and no teacher at all when the market players have no way of distinguishing craven cowardice from a survival strategy.
Even Greenspan and Deutsche Bank's Joseph Ackerman confessed the market does not always act in its own interest.
And wiser heads have seen value in what you might be tempted to call "panic". In 2007, Goldman Sachs and J.P. Morgan slipped quietly away from the Wall Street casino, selling off as quickly as possible without making their "Abandon ship!" strategy obvious.
However, there is a plausible explanation for the historic DOW drop which has less to do with intelligent trading, and more to do with programmed trading decisions. Those responsible for the sell-off-- according to the computer model, anyway-- may NOT have known they were responsible until conditions snowballed into a precipitous drop.
All to say that separating human decisions from automated buy/sell decisions is increasingly difficult, so promulgating a new trading rule in the aftermath of the DOW's biggest daily free-fall may require new limits on programmed trading. The only question becomes when will the limits arrive, and in what form.