SEC and CFTC Report May's Stock Market Crash Due to Single Sale by Mutual Fund
Back in the spring of 2010 -- yeah, all those months ago, May 6 to be exact -- the Dow was rocked by a precipitous crash of nearly 1,000 points for a good solid few minutes. Chaos on Wall Street ensued! And then the Dow went back up, pretty much...and we were left with our memories and the mystery. Who did it? Why? Was it an oafish trader with a "fat finger", a/k/a, a typo? Was it due to the debt crisis in Greece? What about, as later speculated, a hedge fund placing an oversize bet?
Finally, the SEC and the Commodity Futures Trading Commission have uncovered the truth, or more about the truth, according to the New York Times. Though not named specifically in the report, officials have I.D.'d Waddell & Reed Financial, a 73-year-old mutual fund in Kansas focused on mom and pop investors, as the culprit. They apparently started a program to sell $4.1 billion in E-mini futures on the Standard & Poor's 500, using computer sell algorithms programmed to trade without regard to price or time -- the process took 20 minutes as opposed to the more typical 5-hour period. Fast and furious, that pressure "was then transferred from the futures markets to the stock market, leading to the abrupt drop in individual stocks."
But surprise of surprises, Waddell and Reed is no flashy trader getting lap dances while yelling buy-buy-buy/sell-sell-sell. Per the Vancouver Sun, they're "a long-term, buy-and-hold investor," Geoff Bobroff, a fund-industry consultant in East Greenwich, Rhode Island, said. "Their nature is not of an organization that is an active trader." Instead, they're a small company that "holds onto its investments for months or years."
Bloomberg lets them off the hook a bit, saying that Waddell and Reed was just part of the problem, "helping" to trigger a crash related to a convergence of events on a trying financial day.
Meanwhile, Waddell and Reed has issued this statement, in which they basically say "not it":
We believe that the activity of our flexible portfolio funds in the futures market was not the cause of any abnormal price action and that the funds are well positioned to continue protecting and investing shareholders' capital. Our portfolio managers and the funds acted in a manner consistent with the interests of their fund shareholders - we did what our fund shareholders rightly would expect of us. Consistent with the views expressed by the CME and CFTC, there is no evidence to suggest that our trades disrupted the market on May 6, 2010.
C'mon, guys, we wanted somebody to get flogged over this, if only for the fun of it! But maybe it was just a mistake, albeit one less exciting than a fat finger.