One of the more hilarious items of the week was that Waddell & Reed, a relatively minor mutual fund firm based in the trading epicenter of Overland Park, Kansas, was found responsible for the May 6th Flash Crash by the SEC.
Nonsense. Waddell & Reed didn’t cause the Flash Crash any more than Waddell & Reed kidnapped the Lindberg Baby, shot JR Ewing on Dallas, took out Tupac in Las Vegas or stole the cookie from the cookie jar. They simply tripped the landmines that were already in place (and still are to this day).
According to the 104 page report, Waddell & Reed went to the market with a sell order for 75,000 e-mini futures contracts – basically a bet that the S&P 500 would drop. The markets were already jittery and W&R’s trade was unloaded against the market in a mere 20 minutes; most trades of that size are executed over the course of hours. This selling was exacerbated by stop losses being triggered and the vanishing of liquidity from machine trading.
What many of us are shocked about is that the High Frequency Traders are only getting a supporting role in this report rather than the starring one they deserve.
The Great Chicago Fire was “caused” by a cow kicking over a lantern – but the buildings being on top of each other and being essentially constructed of kindling is the real reason the fire was so destructive. To guys like me and Joe Saluzzi (Themis Trading), who have witnessed this market become a robot playground, Waddell & Reed’s stupid trade was just Mrs. O’Leary’s Cow…the market itself and its domination by automatic algorithmic trading should have been the focus.
When a large percentage of the volume in the market each day comes from machines that are programmed to shut themselves down in times of great volatility, we can expect Flash Crashes to occur with increasing regularity, with or without a dumb mutual fund trade.
Waddell & Reed are patsies, the sclerotic underpinnings of a market dependent on false HFT volume were and still are the real danger.