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.

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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.