Mystery Trader in Stock Market Crash Outed, Yet Questions Remain
The "fat finger" trade heard around the world may have actually been a big order of mini-contracts by a trader at Waddell, according to Thompson Reuters. The business wire service cited an internal document from the Chicago Mercantile Exchange pinpointing Waddell and the one trade. The document also called out similar large trades from other firms.
But traders and Wall Street experts say not so fast, that blaming the numbing crash on one trader and one trade is just too easy, too politically expedient and simply doesn't make sense.
Regulators Looking for Man Behind the Curtain
"This populist witch hunt that suggests a greedy Wizard of Oz-style shyster, either at Goldman or Waddell, can control the financial markets from behind the curtain and within the S&P 500 futures market is ludicrous," says Jonathan Hoenig, a portfolio manager at Capitalistpig Hedge Fund.
In the leaked document, the Chicago Mercantile Exchange focused on Waddell's sale of 75,000 so-called E-mini contracts that the document said "superficially appeared to be anomalous activity." E-minis are electronically traded S&P 500 futures on the mercantile exchange.
Following the report, Waddell issued a statement saying that E-mini trades are part of the firm's trading strategies, and these trades are "executed in response to market activity, and are undertaken to protect fund investors from downside risk."
The Overland Park, Kansas-based firm pointed out that the internal document from the Chicago Mercantile Exchange said that it had previously made trades of this size in the past, and it noted that the firm is a "bona fide hedge and not someone intending to disrupt the markets."
Other Firms Did Similar Trades During Market Plunge
Also, Waddell points out that it was one of 250 firms that day that traded E-minis during the market sell-off. Waddell made it clear that like most investors, the company was hurt by the massive sell-off.
The news hurt Waddell's stock price, which dropped 5%, or $1.81, to $32.25 Friday, with four times the average trading volume.
Waddell's response makes sense to Michael Covel, author of the bestselling books Trends Following and The Complete Turtle Trader. He has thought all along the huge sell-off couldn't be the result of one person or one trade.
Covel says a more likely scenario is that one large trade could have triggered a mad sell-off that swept the markets down 10%.
"Everyone is looking for a boogeyman in the trees to blame for this," Covel says. "It's just too big of a drop to be attributed to one trade, and it came during a time of wild market instability. Everyone was selling."
The exchange's document hits on the same points. Quoting from the document, Reuter's said that during the sell-off, similarly sized trades came from Goldman Sachs (GS), JP Morgan Chase (JPM) and Citadel Group (CRGRF). The 20-minute sell-off showed 842,514 E-mini contracts were sold.
The Chicago Mercantile Exchange declined to comment Friday.
SEC Also Narrows Investigation to Futures Trades
The Securities and Exchange Commission has been trying to pinpoint a cause of the May 6 drop. The market recovered more than half of the loss before the end of trading. In congressional testimony this week, SEC officials did say that E-mini contracts helped cause the decline.
"Our preliminary analysis shows that this precipitous decline in stocks (and the subsequent recovery) followed very closely the drop (and recovery) in the value of the E-mini S&P 500 future (which tracks the normal relationship between futures and stock prices for the broader market)," the SEC says in its summary of the events of May 6.
The SEC says the root of the trouble can be linked to investors' worries fueling a sell-off.
"To a great extent, this concern merely reflects a basic fact of market dynamics -- much of the price discovery for the broader stock market occurs in the futures markets," the SEC says. "Those who believe that the broader market is overpriced often will first sell futures for a broad market index rather than sell (buy) the individual stocks that make up that index."
Capitalistpig's Hoenig says the E-minis are incredibly liquid and efficient, and that's exactly why so many traders use them to either assume or hedge positions.
But debunking the single-trade theory, Hoenig points out: "If Waddell sold, someone else bought and took the other side of that trade. Both parties in the trade benefit, as does everybody else who is able to observe the price."