The Banking and Strategy Initiative

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Bad Karma – Discovering the Dow’s ‘sympathetic’ influence in 20 minutes

Early last week, Greece’s villainy of mismanagement quickly covered lost ground in out pacing Goldman Sachs and their friends the Clintons from the headlines. Greece was however soon lost in the details as the devils of program trading were raised on hotlines to call on the Dow giving long investors a window 1000 points below the Dow open, trading Accenture for a penny. Variously, the mechanisms of unrequited stop loss orders on investments ( that do give them liquidity despite their many faults in giving you 5 times worse than brokers yield gap in executon i.e. in getting you the wrong price but letting you exit when you couldn’t call it right)  and high frequency trading were faulted, technology a universal bug bear but only simple steps required by exchanges to ‘restore’ order.

According to a CME Group Inc (CME.O) internal document obtained by Reuters, Waddell sold a large order of e-mini contracts during a 20-minute span on May 6, when U.S. equity markets plunged, briefly wiping out about $1 trillion in market capital.

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 U.S. equities markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from Chicago Mercantile Exchange parent CME Group Inc said.

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.

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.

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


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