|Reuters Reports That Waddell & Reed Is Mystery Seller Of 75,000 E-Minis; Barclays Fails Flow Trading 101|
Tyler Durden on 05/14/2010
In an exclusive report Reuters' Matt Goldstein has uncovered the mystery seller of 75,000 E-Mini contracts during the market melt down. And no, it's not Nassim Taleb as previously reported: the culprit for soaking up ES liquidity (if indeed the selling of 75,000 50x S&P equivalents is enough to throw the market into a 10% tailspin): the "hedging" party is small Kansas-based advisor and asset manager Waddell & Reed (yeah, that was our reaction too). This information is based on an internal CME report which has yet to be disseminated to the general public. Yet the biggest question is not why Waddell trade what it did, when it did, but why did Barclays, which executed the trade for Waddell, stuff the massive order into the pipe, without breaking it up into a thousand child orders first. This is borderline criminal negligence, with Barclays basically begging for their "best executions" practices to be front run by every single algo in existence .
As Matt notes:
Waddell sold on May 6 a large order of e-mini contracts during a 20-minute span in which U.S. equity markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from CME Group Inc said.
And while hardly the catalyst for the selloff, this transaction represented 9% of the total ES volume traded during the crash.
During the 20-minute period, 842,514 contracts in e-minis were traded while Waddell from 2 p.m. to 3 p.m. traded its contracts, CME said. The CME document did not provide a break-out of Waddell's trading during the crucial 20 minutes.
On the other hand, other parties, such as Jump Trading, Goldman Sachs, Interactive Brokers, JPMorgan Chase and Citadel Group were also actively trading E-Minis: we would love to figure out just how much of their trading was flow, how much was prop, how much was hedging, and how much was a malicious attempt to exacerbate the collapse. We are confident that with Goldman's newfound appreciation of the word "transparency" that Mr. Blankfein will have no problems sharing with the world every trade ticket that Goldman executed in that fateful 20 minutes period. And yes, Goldman can white out the name of the beneficiary party on the ticket... As long as it is not Goldman Sachs itself of course.
Yet going back to the Waddell situation, we are curious why the firm would announce its massive block publicly, fully aware it would be front-run by every algo from here to Timbuktu. Why not just go to Sigma X and find a hidden buyer without moving the market? After all, dark pool advocates will claim, this is the very purpose of dark liquidity. Why not this time? And lastly, despite what other may claim, a $432 million trade forcing a 10% drop in the market would indicate that liquidity is probably 10 times worse than even our worse expectations. Of course, an immediate Fill or Kill with massive broker incentives would force every trader to scramble, especially Lehman-cradle robbers Barclays, which executed the trade for Waddell. The real question becomes why did Barclays stuff the order direct without breaking it up first: this is flow execution 10 1 error. Instead of focusing on Waddell, we hope regulators instead do much more investigation on Barclays' order execution "best practices."