No one really gives them much credit for it, but Overland Park, Kansas-based mutual fund house Waddell & Reed’s March 1998 IPO sparked a wave of asset management/financial services deals that dramatically changed the industry.
Meanwhile, no one really seems to think that W&R sparked the infamous May 6 “flash crash,” despite a Reuters report citing documents indicating that the Commodity Futures Trading Commission was examining the money manager’s trading of S&P 500 e-MINI contracts during the turbulent session in question. It may have been slightly unfair to single out W&R, but was it completely wrong?
Not long after the report surfaced, W&R issued a detailed statement asserting that they did nothing out of the ordinary (“We believe we were one of 250 firms engaging in e-mini trading during the period of the market selloff,” the statement said) and wrote to investors stressing that “there is no evidence to suggest that our trades disrupted the market on May 6.”
Soon enough, whatever brief notion there was that a culprit behind the event finally had been identified was soon dismissed with a collective shrug. The hunt for answers would continue. To this day, the Securities and Exchange Commission is still probing the flash crash’s cause and is expected to release a report later this year. In the meantime, market watchers and opinion dispensers have expressed dismay over the idea that we still don’t know what caused the event.
While I’m not suggesting that W&R deserves to be singled out for “causing” anything, it is not unreasonable to think that the confluence of events that led to the flash crash (and flash rebound) indeed sprang, at least partially, from their trading activity, regardless of the firm’s claims to the contrary.
If the flash crash were a jigsaw puzzle depicting a wooden barn set against a rolling green pasture, and it was made up of 117 pieces, imagine if one of the pieces was two-thirds of the barn itself, and that it was several times as large as all the other pieces in the box. W&R might very well have been that outsized puzzle piece.
Obviously, W&R takes issue with such a contention. From their statement in mid-May: “We believe that trades of the size we initiated normally are absorbed easily in the market.”
Are we sure about that?
The CFTC’s Gary Gensler said his agency was focusing on a 19- minute period, between 2:32 ET and 2:51ET when 858,237 e-MINI contracts changed hands. W&R said they sold 75,000 contracts throughout that entire day, carefully stressing that the order represented a mere 1 percent of the entire day’s volume of 858,237 contracts. “People are condensing our volume into a smaller time period of activity,” Roger Hoadley, a W&R spokesman told me last month. By people I am not sure if he meant Reuters reporters, CFTC examiners or market scuttlebutt engagers but I took his point.
While it’s true it would be misleading to suggest that W&R sold all of those 75,000 contracts during the 19 minute period (and I am not suggesting that), the question becomes: What chunk of the 75,000 were sold during that period or right around the beginning of that period or perhaps even just prior to it?
W&R submitted a trade order for 75,000. The order gets filled throughout the day. When the volume spiked during the period in question, most of the order would have been filled during the heavy volume. The original order in and of itself would have been sufficient to spook the e-MINI market, a Chicago veteran e-MINI trader told Reuters at the time of the initial report, and a spike in e-MINI selling would have been sufficient to begin stampedes in S&P component names, say P&G, especially if automated robotic traders took their algorithmic cues from the futures markets.
Again, I’m not saying W&R caused the crash, or engaged in anything other than bona fide hedging. I am saying that in an examination of an ambiguous mosaic, in which the concept of stumbling upon a single smoking gun is an illogical starting premise, the e-MINI trading of W&R should not be dismissed out of hand as a dead end. It’s a piece of a puzzle, and conceivably an outsized one, at least one large enough for people to stop saying “we still don’t know what caused the crash.”
Rich Blake is a New York City-based freelance financial journalist. He currently contributes to Institutional Investor magazine, Reuters HedgeWorld and ABCNews.com, among others.
