Friday, May 14, 2010

A Billion E Mini Trades?

The big meltdown last week in the stock market generated unprecedented finger pointing from Capitol Hill to Main Street. During this storm of criticism some market pundits and more than a politician or two began pointing to a nefarious E Mini trader. Was this perhaps a rogue trader at work in the E Mini market? During the hunt for a proper scapegoat it was offered that this unnamed trader “fat-fingered” his or her keyboard and entered a billion trades at one time instead of the million that was intended. Ahh, a smoking gun. Newspapers were sold (more accurately, mobile devices clicked on to the news app of their choice) and the cause of the meltdown rested in the E Mini trading court.


Now, for the truth. According to an article today from Reuters, the trader in question was identified as the money manager, Waddell & Reed Financial, Inc. However, instead of the billions or millions of trades tossed out by the media, according to Gary Gensler of the Commodity Futures Trading Commission during congressional testimony that Waddell sold 75,000 E Mini contracts during the tumultuous period on May 6. Also trading during this period were Jump Trading, Goldman Sachs, Interactive Brokers, JP Morgan Chase and Citadel Group. Gensler said that there was no suggestion that the trader at Waddell did anything wrong in entering the orders to sell. He went on to point out that the E Mini trades appeared to be part of a bona fide hedging strategy.

During this 20-minute period, a total of 842,514 E Mini contracts were traded. Further, CME spokesman Allan Schoenberg said that “We found no evidence of improper trading activity or erroneous trades by CME Globex customers.”

Does this tell us what happened on May 6? No, but it does clear up what didn’t happen.

Futures trading involves substantial risk and is not suitable for all investors.

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