* Says its trading not the cause of abnormal price action
* Says bid/ask spread widened for less than one second
* Says e-mini rallied during its trading
By Carey Gillam
OVERLAND PARK, Kan, May 17 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
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
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)