Friday, May 14, 2010

Waddell & Reed Says: Take the Stock Market Witch Hunt Elsewhere, We Aren't Responsible for Deep Drop Thursday

The new "not guilty" on Wall Street is "Hey, I lost money that day."

Following in the footsteps of Goldman Sachs, who has been charged with civil fraud by the SEC on a deal where they now proclaim that they lost money, despite the fact that they never ever seem to lose money on any other trade (They just reported that they didn't have a losing day in Q1), Waddell & Reed has issued a press release claiming that on May 6, Deep Drop Thursday, they lost money.

The release was prompted by this Reuters news run by NYT:
A big mystery seller of futures contracts during the market meltdown last week was not a hedge fund or a high-frequency trader as many have suspected, but the money manager Waddell & Reed Financial, according to a document obtained by Reuters. On May 6, Waddell sold a large order of e-mini contracts during a 20-minute span in which the stock market plunged, briefly wiping out nearly $1 trillion in market capital, Reuters reports, citing the internal document from the CME Group. The e-minis are one of the most liquid futures contracts in the world, providing holders exposure to the Standard & Poor’s 500-stock index. The contracts can act as a directional indicator for the underlying stock index. 
In truth, Waddell can be blamed for Deep Throat Thursday about as much as Odd Lot Joe, whose 50 share sell, could have taken out the last bid in Accenture before it went to one cent bid. Waddell moves markets about as often as Steve Jobs dabbles in Microsoft stock.

Nevertheless, everything  from a fat finger, to Nassim Taleb to Waddell has been blamed for what ultimately is the result of an illiquid market, with zero money pumping by the Fed, slowed money pumping in China and zero money pumping by the ECB. The dead cat bounce is over, the dead cat has landed.

There is no chance the dead cat is revived unless the Fed and ECB go on a money printing binge to save, who knows, the Greeks, L.A., Spain or the Big Wind. Talk about money printing won't do it anymore. It has to be newly printed money. I hasten to add that I am not in favor of such money printing, a fixed money supply is what is needed, but mad money pumping at only the sign of total sheer panic and riots is no fun either. If it is discovered that the Fed and ECB just plan to talk money printing and that they haven't even bought any ink, then the global crash/riot mode will continue and accelerate..Here's Waddell's statement trying to ease its way out of being the target of the Stock Market Witch Hunt:

In response to inquiries and published reports, Waddell & Reed Financial, Inc. (NYSE: WDR) today issued the following statement:

On May 6, as on many trading days, Waddell & Reed executed several trading strategies, including index futures contracts, as part of the normal operation of our flexible portfolio funds. Such trades often are executed in response to market activity, and are undertaken to protect fund investors from downside risk. We use futures trading as part of this strategy, broadly known as hedging. This is a longstanding and well monitored practice in certain of our investment portfolios. We believe we were among more than 250 firms that traded the “e-mini” security during the timeframe the market sold off.

Quotes attributed to executives at the CME and the CFTC note that Waddell & Reed has executed trades of this size previously, and indicate that we are a “bona fide hedger” and not someone intending to disrupt the markets. Further, CME noted that they identified no trading activity that contributed to the break in the equity market during this period. Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6.

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