U.S. regulators have concluded that Waddell & Reed Financial Inc.’s trading of Standard & Poor’s 500 Index futures spooked traders on May 6, turning an orderly selloff into a crash that erased $862 billion from the value of American equities in less than 20 minutes, according to two people with direct knowledge of the findings.
Waddell & Reed’s selling of the E-mini futures was part of a normal hedging strategy, according to a report from the Securities and Exchange Commission and Commodity Futures Trading Commission that may be released as soon as today, said the people, who declined to be identified before the findings are made public. The Overland Park, Kansas-based company didn’t attempt to do anything nefarious, and its actions may not have prompted a retreat had there not been other concerns in the market, such as the European debt crisis, the people said.
The SEC has come under pressure from Congress to explain the May 6 crash and prescribe solutions to keep it from happening again. All U.S. equity exchanges adopted circuit breakers in June that pause trading in more than 1,300 securities during periods of volatility to prevent selling from snowballing. SEC Chairman Mary Schapiro said earlier this month that regulators should examine stiffening the obligations faced by market makers who provide orders to buy and sell stocks.
‘Moving Violently’
“Stock prices generally follow futures,” said Mike Bleich, chief executive officer of Scout Trading LLC, a market-making firm in New York. He was previously head of liquidity strategy at Barclays Plc in New York, where he also ran an electronic market-making group. “If futures are moving violently, we’d expect stock prices to also move violently,” he said.
Waddell & Reed will not be identified by name in the report, the people said. The document won’t make any policy recommendations, they said. SEC spokesman John Nester declined to comment.
“I’m not sure it’s appropriate to comment on a report that doesn’t name us specifically, but it’s clear we were one of many traders that day,” said Roger Hoadley, director of communications at Waddell & Reed. “We were merely trying to manage downside risk in our portfolios.”
Lawmakers have asked if the high-frequency firms that have supplanted specialists and market makers with strategies that transact thousands of shares a second destabilized trading by stepping away when they were needed most. Schapiro is trying to protect investors in a fragmented U.S. stock market while maintaining liquidity -- the ease with which investors can buy and sell shares -- on exchanges dominated by firms that profit from computerized trading.
Only Sell Orders
About 250 trading firms processed transactions in E-mini S&P 500 futures from 2 p.m. to 3 p.m. New York time on May 6, regulators said in their May 18 preliminary report on the rout. One of the largest firms selling the E-mini contract accounted for about 9 percent of volume from 2:32 p.m. until 2:51 p.m., they said. The firm, which wasn’t named, sold the contract short to hedge other positions and “only entered orders to sell,” according to the May 18 report.
“The trader sold on the way down and continued to do so even as the price level recovered,” the report said four months ago. “This trader and others have executed hedging strategies of similar size previously.”
Regulators said in their earlier report they were examining possible linkages between price declines in equity index futures, exchange-traded funds and individual securities and the “extent to which activity in one market may have led the others.”
Spread Widens
CME data indicate trading volume in E-mini S&P 500 futures was high on May 6, with many more sell orders than buy requests from 2:30 p.m. to 2:45 p.m., according to the May 18 report from the SEC and CFTC. Data also showed that the bid-ask spread, or difference between the highest price at which investors can sell contracts and the lowest at which they can buy, “widened significantly at or about 2:45 p.m. and that certain active traders partially withdrew from the market.”
E-mini S&P 500 futures are the largest contract by volume traded on the Chicago Mercantile Exchange, owned by CME Group Inc. Chief Executive Officer Craig Donohue said on June 22 that volume in the June E-mini S&P 500 futures on May 6 was 5.7 million contracts, with about 1.6 million, or 28 percent, trading from 2 p.m. to 3 p.m. New York time. At about 2:45:28 p.m. the contracts declined 12.75 points in half a second when 1,100 were sold by multiple traders, he said.
“Considerable selling pressure at this vulnerable period in time may have contributed to declining prices in the E-mini S&P 500 -- and other equivalent products such as” the SPDR S&P 500 ETF Trust, an exchange-traded fund tracking the benchmark measure of U.S. stocks, the report said.
“All of these markets are closely linked by a complex web of traders and trading strategies,” regulators wrote four months ago. “The precipitous decline in price in one market on May 6 may have influenced a sustained series of selling in other financial markets.”
To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net.
To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net.
http://jodnet.blogspot.com
Waddell & Reed’s selling of the E-mini futures was part of a normal hedging strategy, according to a report from the Securities and Exchange Commission and Commodity Futures Trading Commission that may be released as soon as today, said the people, who declined to be identified before the findings are made public. The Overland Park, Kansas-based company didn’t attempt to do anything nefarious, and its actions may not have prompted a retreat had there not been other concerns in the market, such as the European debt crisis, the people said.
The SEC has come under pressure from Congress to explain the May 6 crash and prescribe solutions to keep it from happening again. All U.S. equity exchanges adopted circuit breakers in June that pause trading in more than 1,300 securities during periods of volatility to prevent selling from snowballing. SEC Chairman Mary Schapiro said earlier this month that regulators should examine stiffening the obligations faced by market makers who provide orders to buy and sell stocks.
‘Moving Violently’
“Stock prices generally follow futures,” said Mike Bleich, chief executive officer of Scout Trading LLC, a market-making firm in New York. He was previously head of liquidity strategy at Barclays Plc in New York, where he also ran an electronic market-making group. “If futures are moving violently, we’d expect stock prices to also move violently,” he said.
Waddell & Reed will not be identified by name in the report, the people said. The document won’t make any policy recommendations, they said. SEC spokesman John Nester declined to comment.
“I’m not sure it’s appropriate to comment on a report that doesn’t name us specifically, but it’s clear we were one of many traders that day,” said Roger Hoadley, director of communications at Waddell & Reed. “We were merely trying to manage downside risk in our portfolios.”
Lawmakers have asked if the high-frequency firms that have supplanted specialists and market makers with strategies that transact thousands of shares a second destabilized trading by stepping away when they were needed most. Schapiro is trying to protect investors in a fragmented U.S. stock market while maintaining liquidity -- the ease with which investors can buy and sell shares -- on exchanges dominated by firms that profit from computerized trading.
Only Sell Orders
About 250 trading firms processed transactions in E-mini S&P 500 futures from 2 p.m. to 3 p.m. New York time on May 6, regulators said in their May 18 preliminary report on the rout. One of the largest firms selling the E-mini contract accounted for about 9 percent of volume from 2:32 p.m. until 2:51 p.m., they said. The firm, which wasn’t named, sold the contract short to hedge other positions and “only entered orders to sell,” according to the May 18 report.
“The trader sold on the way down and continued to do so even as the price level recovered,” the report said four months ago. “This trader and others have executed hedging strategies of similar size previously.”
Regulators said in their earlier report they were examining possible linkages between price declines in equity index futures, exchange-traded funds and individual securities and the “extent to which activity in one market may have led the others.”
Spread Widens
CME data indicate trading volume in E-mini S&P 500 futures was high on May 6, with many more sell orders than buy requests from 2:30 p.m. to 2:45 p.m., according to the May 18 report from the SEC and CFTC. Data also showed that the bid-ask spread, or difference between the highest price at which investors can sell contracts and the lowest at which they can buy, “widened significantly at or about 2:45 p.m. and that certain active traders partially withdrew from the market.”
E-mini S&P 500 futures are the largest contract by volume traded on the Chicago Mercantile Exchange, owned by CME Group Inc. Chief Executive Officer Craig Donohue said on June 22 that volume in the June E-mini S&P 500 futures on May 6 was 5.7 million contracts, with about 1.6 million, or 28 percent, trading from 2 p.m. to 3 p.m. New York time. At about 2:45:28 p.m. the contracts declined 12.75 points in half a second when 1,100 were sold by multiple traders, he said.
“Considerable selling pressure at this vulnerable period in time may have contributed to declining prices in the E-mini S&P 500 -- and other equivalent products such as” the SPDR S&P 500 ETF Trust, an exchange-traded fund tracking the benchmark measure of U.S. stocks, the report said.
“All of these markets are closely linked by a complex web of traders and trading strategies,” regulators wrote four months ago. “The precipitous decline in price in one market on May 6 may have influenced a sustained series of selling in other financial markets.”
To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net.
To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net.
http://jodnet.blogspot.com
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