Waddell & Reed behind Friday's equity market fall: report

Waddell & Reed, a relatively small investment fund, is apparently behind Friday's market mayhem, according to market sources.

Waddell sold a large order of `e-mini' contracts in a 20-minute span on 6 May, in which US equity markets plunged, briefly, wiping out nearly $1 trillion in market capital.

The transactions "superficially appeared to be anomalous activity," according to documents with the CME Group Inc.

Waddell reportedly sold 75,000 e-mini contracts, (or about 9 per cent of the total volume of futures contracts sold). These liquid futures contracts linked to the S&P 500 Index played a big role in the 1,000-point intraday drop in the Dow Jones Industrial Average on 6 May 2010, documents showed.

Canadian newspaper Toronto Star reported on Friday that Waddell Reid has acknowledged that its traders as usual had executed several strategies that day, including the use of index futures contracts, to hedge against downside risk.

The Chicago Mercantile Exchange and the Commodities Futures Trading Commission, however, have found no wrongdoing on Waddell & Reed's part.

Waddell & Reed has been using its strategy to drive investor inflows into its Ivy Asset Strategy WASAX and Ivy Global Natural Resources IGNAX funds during the last few years using third-party distributors.
 
However, it is not yet clear what impact the unusual trading in the futures contracts had on the broader meltdown in the stock market.

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