New York: 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 on May 6 sold a large order of e-mini contracts during a 20-minute span in which US equities markets plunged, briefly wiping out nearly $1 trillion (Dh3 trillion) in market capital, the internal document from Chicago Mercantile Exchange parent CME Group said. Regulators and exchange officials quickly focused on Waddell's sale of 75,000 e-mini contracts, which the document said "superficially appeared to be anomalous activity".
More than a week after the incident, it was still not clear what impact the unusual trading in the futures contracts had on the broader meltdown in the stock market.
The e-minis are one of the most liquid futures contracts in the world, providing holders exposure to the benchmark Standard & Poor's 500 Index. The contracts can act as a directional indicator for the underlying stock index.
Waddell manages the $22.1 billion Ivy Asset Strategy fund, which is well-known for hedging with equity index futures when manager Mike Avery, who is also chief investment officer at the company, feels uneasy about the market.
The Asset Strategy fund has dropped 2.76 per cent this quarter, compared with a 0.80 per cent decline in the S&P 500, data from Lipper Inc, a unit of Thomson Reuters show.
Testimony
Gary Gensler, chairman of the US Commodity Futures Trading Commission, said in congressional testimony last Tuesday that it had found one sale that was responsible for about 9 per cent of the volume in e-minis during the selloff in the US markets.
Gensler said there was no suggestion that the trader, whom he did not identify, did anything wrong in only entering orders to sell. Gensler said data showed that the trades appeared to be part of a bona fide hedging strategy.It is unclear what impact the trading in the e-minis had on stock prices during the plunge, but regulators have scrutinised futures trading because the sharp decline in that market preceded the dive in the broader US equities market.
The document said that during the selloff and subsequent rally, other active traders in e-minis included Jump Trading, Goldman Sachs Group, Interactive Brokers Group, JPMorgan Chase & Co and Citadel Group.
During the 20-minute period, 842,514 contracts in e-minis were traded. The CME document did not provide a breakout of Waddell's trading during that crucial time, but said from 2pm EDT (1800 GMT) to 3pm it traded 75,000 contracts.
Overland Park, Kansas-based Waddell declined to return calls seeking comment. But in a statement, the company said: "Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6."
Waddell said in its statement that it often uses futures trading to "protect fund investors from downside risk," and on May 6 it executed several trading strategies including the use of index futures contracts as part of normal operations.
The notional value of the contracts sold by Waddell was $4.2 billion, according to document. How much Waddell paid for the contracts was not stated, but typically the cost would be far less than their notional value. The company, which advises and distributes the Ivy Funds, has made a name with good results from its family of mutual funds.
Waddell's shares fell after the Reuters report, and closed down 5.3 per cent at $32.25. Volume was 1.28 million shares, more than triple the daily average this year.
Analyst Jason Weyeneth of New York brokerage Sterne Agee said he had not learned anything on Friday to lead him to change his "neutral" rating on Waddell stock. The CFTC declined to comment.
A CME spokesman, who declined to comment on the document, said the Chicago-based futures exchange operator never discusses customer activity.
