- The Big Picture - http://www.ritholtz.com/blog -

Waddell Stupidity Caused Crash

Posted By Guest Author On October 4, 2010 @ 10:31 am In Think Tank,Trading | Comments Disabled

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]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] [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] [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] [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. http://dealbook.blogs.nytimes.com/2010/05/17/waddell-distances-itself-from-flash-crash/ [5]

4 http://finance.yahoo.com/q/it?s=WDR+Insider+Transactions [6]

——————————————————————————-
Sincerely,

Dave Cummings

Owner & Chairman

Tradebot Systems, Inc.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/10/waddell-stupidity-caused-crash/

URLs in this post:

[1] [: #_ftn1

[2] [2]: #_ftn2

[3] [3]: #_ftn3

[4] [4]: #_ftn4

[5] http://dealbook.blogs.nytimes.com/2010/05/17/waddell-distances-itself-from-flash-crash/: http://dealbook.blogs.nytimes.com/2010/05/17/waddell-distances-itself-from-flash-crash/

[6] http://finance.yahoo.com/q/it?s=WDR+Insider+Transactions: http://finance.yahoo.com/q/it?s=WDR+Insider+Transactions

Copyright © 2008 The Big Picture. All rights reserved.