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Waddell & Reed says not cause of May 6 flash crash


The final numbers of the day's trading is shown on a board on the floor of the New York Stock Exchange in New York May 6, 2010. REUTERS/Lucas Jackson
The final numbers of the day's trading is shown on a board on the floor of the New York Stock Exchange in New York May 6, 2010. REUTERS/Lucas Jackson

By Carey Gillam

OVERLAND PARK, Kan (Reuters) - U.S. money manager Waddell & Reed Financial Inc <WDR.N> said an internal analysis of trading activity indicates it was not the cause of the "flash crash" that briefly wiped out $1 trillion in market capital earlier this month.

"We did what our fund shareholders rightly would expect of us. There is no evidence to suggest that our trades disrupted the market on May 6," the company said in a letter to its financial advisers.

Reuters reported last week that regulators and officials at the Chicago Mercantile Exchange parent CME Group Inc <CME.O> <CME.O> have focused on Waddell's sale of 75,000 e-mini contracts as at least "superficially" anomalous activity.

It is 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.

In a communication over the weekend to more than 2,000 advisers and wholesalers, Waddell & Reed said the events of May 6 unfolded after portfolio managers came to the conclusion that the risk of the European sovereign debt crisis spilling into the U.S. financial system was increasing and they needed to cut their flexible portfolio funds' equity exposure quickly.

As part of an equity hedging strategy, the managers used the e-mini S&P 500 Index futures contract, which is highly liquid and widely traded.

Waddell said its selling of the e-minis that day was just 1 percent of overall trading volume, or 75,000 contracts out of 5.7 million traded that day.

"We believe that trades of the size we initiated normally are absorbed easily in the market," Waddell & Reed said in the letter to advisors, estimating it was one of 250 firms engaging in e-mini trading during the market selloff.

The CME has said all Waddell's e-mini sales took place between 2 p.m. and 3 p.m., the period of the flash crash when 1.6 million total e-mini sales occurred.

Waddell said the behavior of both the e-mini's price and bid/ask spread "do not suggest that our trades had a disruptive effect." The bid/ask spread widened during the firm's trading for less than one second, the firm said.

"The e-mini rallied during our trade, suggesting it was not causing the price movement," the firm said.

Waddell said its portfolio managers see the e-mini S&P 500 Index futures contract, which is a cash-settled contract based on the S&P 500 Stock Index, as the "deepest global liquidity pool they can utilize" to protect shareholder investments.

The firm reiterated that its funds lost money that day, and said the activity in its flexible portfolio funds in the futures market were not the cause of any abnormal price action.

Waddell manages the $22.1 billion Ivy Asset Strategy <WASCX.O> fund, which is well-known for hedging with equity index futures .

(Reporting by Carey Gillam; additional reporting by Herbert Lash in New York, Ross Kerber in Boston; Editing by Gary Hill)

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