Market manipulation or mystery trader: This doesn’t pass the smell test

Waddell is mystery trader in market plunge

NEW YORK (Reuters) - 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 sold on May 6 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."

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said in congressional testimony on Tuesday that it had found one sale was responsible for about 9 percent of the volume in e-minis during the sell-off in the U.S. 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 show that the trades appeared to be part of a bona fide hedging strategy.

It's unclear what impact the trading in the e-minis had on stock prices during the plunge, but regulators have scrutinized futures trading because the sharp decline in that market preceded the dive in the broader U.S. equities market.

The CME document shows that during the sell-off and subsequent rally, other active traders in e-minis included Jump Trading, Goldman Sachs Group Inc, Interactive Brokers Group Inc, JPMorgan Chase & Co and Citadel Group.

During the 20-minute period, 842,514 contracts in e-minis were traded while Waddell from 2 p.m. EDT 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.