This is from Dave Cummings, Owner & Chairman, Tradebot Systems, Inc.


Waddell Stupidity Caused Crash

Just some innocent hedging?

Wow! Who puts in a $4.1 billion order without a limit price? The trader at Waddell & Reed showed historic incompetence. Here’s how the regulators described his actions:

However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes.[1]

How big was the trade?

The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year.[2]

This was a human mistake.

The trader could have easily put a price limit on the order, but recklessly chose not to. The Sell Algorithm performed exactly as it was designed. It angers me when people blame technology for what are clearly lapses in human judgment.

Waddell’s Response

You would expect Waddell to apologize for the carnage they caused. Well, here’s what they said:

“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.[3]

Do they really think their shareholders expect them to crash the market? Has this guy gotten fired?

Was this gross negligence?

I’ll leave that as an exercise for the class action attorneys. Their shareholders probably lost $100 million that day (versus a reasonable execution 3% higher).

Awaiting Regulatory Response

Now that the regulators know what happened, what are they going to do? Is there any penalty for massively disrupting the market? Are we going to let people throw around billion-dollar orders with no understanding of market impact?

…and if you don’t believe in your company…

Sell the stock. After the flash crash but before the CFTC/SEC report came out, Waddell executives were unloading stock in their company. According to SEC filings, Waddell CEO Henry Herrmann sold $2,455,000 and Ivy Asset Strategy Fund Manager Michael Avery dumped $273,600.[4]

Maybe these brilliant market timers expect things to get worse…


[1] CFTC/SEC report “Findings Regarding the Market Events of May 6, 2010”.

2 ibid.

3 New York Times DealBook.



Dave Cummings

Owner & Chairman

Tradebot Systems, Inc.

Category: Think Tank, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Waddell Stupidity Caused Crash”

  1. David Merkel says:

    W&R may have been been the proximate cause of the crash, but why blame them for knocking over the first domino when they couldn’t see the string of dominoes behind it?

  2. t14na27 says:

    Hmmm. According to the CME Group, Mr. Cummings needs to lay off of the government sponsored kool-aid.

    “Futures and options markets are hedging and risk transfer markets. The report references a series of bona fide hedging transactions, totaling 75,000 contracts, entered into by an institutional asset manager to hedge a portion of the risk in its $75 billion investment portfolio in response to global economic events and the fundamentally deteriorating market conditions that day. The 75,000 contracts represented 1.3% of the total E-Mini volume of 5.7 million contracts on May 6 and less than 9% of the volume during the time period in which the orders were executed. The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices. These hedging orders were entered in relatively small quantities and in a manner designed to dynamically adapt to market liquidity by participating in a target percentage of 9% of the volume executed in the market. As a result of the significant volumes traded in the market, the hedge was completed in approximately twenty minutes, with more than half of the participant’s volume executed as the market rallied – not as the market declined. Additionally, the aggregate size of this participant’s orders was not known to other market participants.

    Additionally, the most precipitous period of market decline in the E-Mini S&P 500 futures on May 6 occurred during the 3½ minute period immediately preceding the market bottom that was established at 13:45:28. During that period, the participant hedging its portfolio represented less than 5% of the total volume of sales in the market.”

  3. bda_guy says:

    In my opinion, to say that Waddell caused the crash is not entirely true. They were the catalyst that caused other automatic trading systems to withdraw liquidity which caused the market to crash. Under less stressed circumstances, the Waddell trade would have largely cleared and not caused all of the other systems to overreact. The fact that automatic trading systems do not respond well to sparse liquidity conditions demonstrates the true weakness in the system.

  4. pmorrisonfl says:

    I read the Cummings argument as roughly ‘Someone speeding recklessly caused the entire Interstate Highway System to fail, therefore it was the fault of the speeder.’

    I’m more of a mind to believe the CME group’s presentation quoted by t14na27.

  5. HelicopterBen says:

    “Waddell Stupidity Caused Crash”
    … and the pigs fly …

  6. NotQuiteSo says:

    According to the CME, the Waddell order was 9% of the volume during the crash. That was by design. The algorithm was restricted to sending in 9% of the previous minute’s volume. So it was not a $4.1 billion order dumped into the market all at once, as Cummings implies. It was a $4.1 billion order intended to be worked slowly, in such a way to minimize its own price impact.

    Instead, in an already spooked market, it was apparently enough to send high-frequency firms into a panic, and they began playing “hot potato” (as the SEC’s report says), selling everything they could and withdrawing. Dave Cummings’ own computers noticed the high-frequency panic and pulled out, likely adding to the panic. And he blames Waddell?

  7. oka says:

    According to the SEC report the algo was designed to participate in 9% of the previous minute’s volume regardless of price. This is a crucial difference. It can very likely have functioned as the catalyst for the crash pushing prices down further for lack of price restrictions. The large price fluctuations then leading to a feedback loop (increased trading volume because of risk transfer between futures markets and stock markets for example), which then lead to accelerated selling by the rogue algo from Waddell.
    It might also be useful to read Jim Simons take on the May 6th events.

  8. pmorrisonfl says:

    Reading the defenses of HFT vs. Waddell and Reed, I recall
    ‘A robot must protect its own existence as long as such protection does not conflict with the First or Second Law’

  9. spragus says:

    It’s pretty clear by the volume stats that W&R was not a plausibe “cause” of the flash crash. But Simon’s claim that the HFT traders have reduced spreads, must be taken with a grain of salt when we we recall that the SEC mandated penny spreads vs the former nickles and dimes (eighths quarters etc.).

  10. [...] By now every world citizen who has ever owned any stock knows “Waddell” as a household word. The regulators do not name them specifically in their October 1st SEC/CFTC Flash Crash Report (available here), yet the firm’s identity might just top the world’s worst-kept-secret list. If there were not enough references to Waddell and Reed over the weekend on Twitter and thousands of blogs, Dave Cummings, owner the HFT powerhouse Tradebot may have rectified that with his letter to the street, titled “Waddell Stupidity Caused The Crash” (available here). [...]

  11. [...] snippets: Dave Cummings, Owner & Chairman, Tradebot Systems, Inc. doesn’t mince words: Waddell Stupidity Caused Crash: Wow! Who puts in a $4.1 billion order without a limit price? The trader at Waddell & Reed [...]

  12. dedalus says:

    Dave Cummings is right, though I don’t see why he estimates W&R’s shareholders lost $100mm.

    Michael Avery’s algo not only annihilated the bids for cash & futures, it annihilated the bid for the cash-futures arbitage, the spread (or “basis”). On the day of the flash crash the theoretical “fair value” of the SPU/SPX basis was “X”. But Avery sold so many futures so quickly that the spread collapsed, as the arbs were forced to lower their bids for it as they got increasingly long futures and short cash.

    I’d guess that W&R, on the spread basis (which is the only way to measure this), probably lost 2 or 3 ticks on 75,000 e-minis, which would be about $2 or $3 million dollars, far less than Cummings’ estimate but still way too large. Avery ought to be fired.

    I believe Dave Cummings’ firm participates in about 10% of all stock trading. The posters above who dismiss his views would be wise to heed them.