High-Frequency Trading Firms Not To Blame for Market Plunge

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 and reported in their website on Friday. “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.”

Reuters’ Herbert Lash and Jonathan Spicer report: “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. 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.”

“Trading in e-minis takes place entirely on the CME’s Globex exchange. Hedge funds and high-speed trading firms often use the e-mini in an arbitrage strategy that seeks to capture the change in prices between the futures contract and the S&P 500. An order the size of the Waddell contract would be a big trade to execute on a normal day, said a trader whose firm is active in the S&P 500 futures market. About 50,000 contracts are typically traded in an hour, the trader said. ‘To get rid of 75,000 contracts, that’s a lot of trading even if the market is healthy; 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’.”

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