Sunday, May 16, 2010


Please examine the story from Reuters here that examines the broker dealer Waddell & Reed as a possible source for the drop in the markets on May 6.

The story goes that sometime in the 20 to 30 minutes of nuttiness, Waddell & Reed entered in a trade to sell 75,000 e-mini contracts into the market.  The sale had a notional value of close to $4 Billion.  Waddell manages several mutual funds and explained that they were employing a hedging strategy for protect their clients.  In the text of the story we see some other pieces of data to note.

On average, 50,000 e-mini contracts usually trade in an hour, but in the specific 20 minute period of the fall and rise in the market almost 850,000 e-mini contracts exchanged hands.

Here's the money quote -

"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."

So again, this story raises more questions than answers and I'm just going to lay them out in no particular order.

1)  Where is the mysterious "fat-finger" trade of 16,000,000,000 future trades that CNBC kept referring to?
2)  What broker or hedge fund really went bankrupt in that time period.  If something happened according to the rumor, someone really blew up.
3)  Is it any coincidence that the politicians were examining Fed and bank regulation right at the time of the drop?
4)  Who caused the amazing rally that made the markets rise 700 DOW points from the lows?
5)  Does anyone really trust this market?
6)  When are we going to unplug the computers that are doing HFTs?