* Tradebot Systems: "Waddell Stupidity Caused Crash"
* Waddell says no changes needed after Oct. 1 report
* Feud shows calls for more judgments from regulators
* KC "a mini-financial center that nobody ever heard of"
By Ross Kerber and Carey Gillam
BOSTON/KANSAS CITY, MO., Oct 22 A cowtown
squabble between two financial firms along the Missouri River
highlights the unresolved questions facing regulators after the
May 6 "flash crash" that disrupted markets worldwide.
Kansas City, known more for beef than bankers, is now home
to both a leading high-frequency trading firm, Tradebot
Systems, and old-line mutual fund manager Waddell & Reed
Financial Inc (WDR.N). Regulators this month cited trading by
Waddell & Reed as a trigger for the crash, which temporarily
wiped out $1 trillion.
Officials did not sanction the firm or even name it, though
it was quickly identified by Reuters and other news
organizations. The situation rankles some high-frequency
traders who fear stricter rules and blame the fund company.
Pushing this case hardest is Dave Cummings, founder of
Tradebot, on the eastern, Missouri side of the state border
that divides Kansas City in half. "Waddell Stupidity Caused
Crash," Cummings titled an Oct. 3 memo.
"The first people everyone blames are the high frequency
guys, but it began with the mutual fund guys," he told
Waddell & Reed declined to respond directly. But it has
previously denied wrongdoing and lately launched a
behind-the-scenes campaign of its own to win back skeptical
investors. When one asked about the crash on an Oct. 12
conference call run by a fund that placed some of the trades,
Asset Strategy, manager Ryan Caldwell was unapologetic.
"We have not changed anything. We're not going to be
changing anything," said Caldwell. "We're very confident in the
processes, the tools, the markets and the people that we
To some experts, the back-and-forth shows the questions the
Securities and Exchange Commission and the Commodity Futures
Trading Commission so far have failed to answer, fueling
uneasiness among traders and fund managers.
"There's a lot of fear in the (financial) community that
they will be punished" by whatever solution regulators
ultimately come up with, said Robert Litan, a Brookings
Institution economist who recently returned to his Kansas roots
and now oversees research at Kansas City's Kauffman Foundation
-- begun by a one-time owner of the city's Royals baseball
"Anybody who could be affected by the solution is pointing
the finger at somebody else," he said.
SEC and CFTC officials would not comment.
FORMER WSJ REPORTER HELPED START FUND FAMILY
Litan added there is some irony the debate is playing out
in a prairie city few realize is also home to American Century
Investments and a Federal Reserve branch. "We are like a
mini-financial center that nobody ever heard of," he said.
Waddell & Reed manages $68 billion with 900 workers at a
campus in the Kansas-side suburb of Overland Park. It was
founded in 1937 by former Wall Street Journal reporter Chauncey
Waddell and securities salesman Cameron Reed. Asset Strategy is
now its biggest fund, which Caldwell and Michael Avery run with
a gunslinger style unusual in the staid mutual funds industry.
The fund is among a growing number of "flexible portfolio"
funds, with a broad mandate allowing it to invest more like a
hedge fund than a traditional equity portfolio. Big holdings
lately include gold and shares in Asian casino operators that
Avery bets are poised to ride a middle-class boom.
The fund's returns and inflows fell off in the first half
of 2010, but its track record has improved lately. For the
three months ended Sept 30, Asset Strategy took in $216
million, according to Lipper, a Thomson Reuters unit. Waddell &
Reed is scheduled to report third-quarter earnings on Oct. 26.
Analysts say better numbers and lack of sanctions would
help the company's stock, down 10 percent this year, catch up
with peers, whose shares are down an average of 4 percent. "The
issue of the flash crash is behind them," said Gabelli & Co's
A HIGH FREQUENCY TRADER FIRES BACK
Not so fast, Cummings says. Cummings, a native Kansas
Citian, previously traded wheat contracts before starting
Tradebot in 1999, one of the first firms of its kind. Cummings
says it was reckless for Waddell & Reed to omit a price limit
that would have halted sales on May 6.
"It angers me when people blame technology for what are
clearly lapses in human judgment," he wrote in his note.
A Waddell & Reed spokesman, Roger Hoadley, declined to
comment on Cummings' memo. But he noted a report by researcher
Nanex LLC -- using data with Waddell's permission -- that found
most of the fund manager's May 6 trades came after the market
bottomed, at a time the trades had supposedly caused demand to
Cummings said the Nanex report did not account for enough
trades. "I stand by my note," he said.
Nanex Chief Executive Eric Hunsader said the data at least
shows the fund was "well behaved." But regulators should
further probe the role high-frequency traders played, he said.
(Additional reporting by Herbert Lash and Jonathan Spicer;
Editing by Steve Orlofsky)