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, 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. equity markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from CME Group Inc. said.
Regulators and exchange officials quickly focused on Waddell's sale of 75,000 e-mini contracts, which "superficially appeared to be anomalous activity," the document said.
Gary Gensler, chairman of the Commodity Futures Trading Commission, said in congressional testimony Tuesday that it had found one sale was responsible for about 9 percent of the volume in e-minis during the selloff in the U.S. markets.
The e-minis are one of the most liquid futures contracts in the world, providing holders exposure to the benchmark Standard & Poors 500 Index. The contracts can act as a directional indicator for the underlying stock index.
Gensler said there was no suggestion that the trader, who he did not identify, did anything wrong in only entering orders to sell. Gensler said data shows that the trades appeared to be a bona fide hedging strategy.
The CME document shows that during the selloff and subsequent rally, other active traders in e-minis included Jump Trading, Goldman Sachs, Interactive Brokers, JPMorgan Chase and Citadel Group.
During the 20-minute period, 842,514 contracts in e-minis were traded while Waddell from 2 p.m. to 3 p.m. traded its contracts, CME said.
The CME document did not provide a break-out of Waddell's trading during the crucial 20 minutes.
Overland Park, Kan.-based Waddell did not comment. CFTC also declined to comment.
A CME spokesman, who declined to comment on the document, said the Chicago-based futures exchange operator never discusses customer activity.
"We found no evidence of improper trading activity or erroneous trades by CME Globex customers," said CME spokesman Allan Schoenberg.
Waddell's contracts were executed at Barclays and later given up to Morgan Stanley, according to the document.
CME said it spoke to representatives from both banks on May 6 and planned to speak to Waddell representatives the following day. The firm oversaw $74.2 billion in assets as of March 31.
Morgan Stanley told CME that it "did not have concerns regarding the activity," the document said, because Waddell "would typically use equity index futures to hedge macro market risk associated with the substantial long exposure of its clients."
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 document said. 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 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 trader said.
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