This Has To Be A Joke: SEC About To Blame Entire Flash Crash On Waddell And Reed's E-Mini Trades

Tyler Durden's picture

Bloomberg has just released something which if true, will wipe out every last ounce of credibility left in the market. As readers will recall, the initial scapegoat that CNBC and everyone else, who has no clue what really happens in the market decided to pin the flash crash on, was small Kansas-based trading firm Waddell & Reed, which traded a few extra contracts of E-Mini futures in the hours preceding the flash crash. Well, ladies and gentlemen, if this advance glance into what the SEC is about to disclose in its flash crash report is indeed valid, then the entire flash crash is about to be blamed on Waddell and Reed once again, with no mention of High Frequency Trading, or any of the other real culprits for the drop which wiped out $1 trillion in market cap, and the furthermore the report will have no policy recommendations. This is so insulting to the general intelligence of the average American investor who has by now seen the destructive influence of HFT in action so many times, that it will wipe out the last remaining shards of credibility left in US stocks. Will Mary Schapiro next blame every single mini flash crash which we have seen on almost daily basis over the past month on Waddell and Reed as well? Or is that reserved for E-Trade retail accounts? We will not pass judgment until we see the final report, but if true, this is immediate grounds for termination of the SEC head, and will require that everyone pull their money from the market asap, as it will definitely confirm that even our regulators have no clue just how broken the market truly is. It will also confirm that every single SEC staffer has been bribed, bought and corrupted beyond repair by the HFT lobby.

From Bloomberg:

U.S. regulators have concluded that Waddell & Reed Financial Inc.’s trading of Standard & Poor’s 500 Index futures spooked traders on May 6, turning an orderly selloff into a crash that erased $862 billion from the value of American equities in less than 20 minutes, according to two people with direct knowledge of the findings.

Waddell & Reed’s selling of the E-mini futures was part of a normal hedging strategy, according to a report from the Securities and Exchange Commission and Commodity Futures Trading Commission that may be released as soon as today, said the people, who declined to be identified before the findings are made public. The Overland Park, Kansas-based company didn’t attempt to do anything nefarious, and its actions may not have prompted a retreat had there not been other concerns in the market, such as the European debt crisis, the people said.

Waddell & Reed will not be identified by name in the report, the people said. The document won’t make any policy recommendations, they said.

“I’m not sure it’s appropriate to comment on a report that doesn’t name us specifically, but it’s clear we were one of many traders that day,” said Roger Hoadley, director of communications at Waddell & Reed. “We were merely trying to manage downside risk in our portfolios.”

SEC spokesman John Nester declined to comment.


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ATG's picture

Anyone watch the Senate Finance Committee hearings today with heads of Government Regulatory Departments reading scripts at third grade level?

StychoKiller's picture

Hukd on foniks wurkd reel gud for mee!

bigdumbnugly's picture

waddell and reed, eh?

i thought they had ample video evidence already against some woman named debbie in dallas?

subqtaneous's picture

yeah, weren't they just the two old gents selling wine coolers from the front porch?


StychoKiller's picture

"Thank you for your support." -- Bartles (or was that James?)

Jeff Lebowski's picture

You were right earlier, Tyler...

Fuck it.

andybev01's picture


If Waddell & Reed wield that much power where can I apply for a job?!

Assetman's picture

Not only that, but... I didn't know that algos could be spooked.

Divided States of America's picture


Their site is still up, for now.....but soon to be shut down for SEC investigation.

Wonder which small advisory firm they will throw under the bus after the next flash crash.


StychoKiller's picture

We need braver robots, like Bender Bending Rodriguez!

Recruit from the "Robot Fighting League."

Billy Ray Val's picture

It was the Dukes!  It was the Dukes!

Hrundi V. Bakshi's picture

someone owes a dollar to waddell and reed for winning the bet to crash the market.

Spalding_Smailes's picture

Straw Man' Bitchez

The origins of the term are unclear;  given is that it originated with men who stood outside courthouses with a straw in their shoe in order to indicate their willingness to be a false witness.

traderjoe's picture

And once again the dofuses in charge miss the unintended consequences.

If it was so easy to start a flash crash (one firm placing a middle-sized order) doesn't that mean it could happen again at any time?

It would be a better cover story to suggest it was a strange confluence of a vast array of circumstances that would be virtually impossible to replicate. Hell, blame it on those aliens anticipated by the UN or that messed with the nukes. A futures order placed to hedge exposure? Any day now...


centerline's picture

Insulting to those who don't buy it.  Condemning to those who do anyhow.  Either way, another nail in the coffin has been pounded into place.

Eternal Student's picture

The question is, who's coffin? The SEC is going to look incredibly silly (or sillier) going forward, as it becomes increasingly obvious that they either don't know what's going on, or are deliberately choosing to ignore the problem.

This is basically an infowar problem. You've got lots of people, driven by lots and lots of money, trying to hack the system, with the potential reward of some really big bucks. The flash crashes are simply the first by-product of this effort, and the way these things work is that you can expect it to escalate. I wouldn't be surprised to see it move up so that the bot creators start trying to hack the other bot creators.

The end result of this will be (as these things always are) an unexpected outcome. Someone trying to outsmart someone else, with unintended consequencies. There's a good chance that the next big crash won't be a flash one, but triggered by such.

By the time this happens, the SEC will be left wondering what the heck just happened, and looking even more silly.

As for who's coffin, I suspect all of us will be jumping in.

StychoKiller's picture

Everybody KNOWS it was Libyan Hackers with their '286 Turbo PCs! :>D

Mr Lennon Hendrix's picture

Insulting our intelligence?  The Government?  Naaaah!  Where the hell is my HOPEum pipe?

LostWages's picture

I prefer Hopium blunts.

Good to know that in addition to having best politicians money can buy, we also add to the list regulators too.

Problem Is's picture

Smoke them green shoots, bitchez...
Makes Obummer-nomics "No Bankster Left Behind" (NBLB) more palatable...

Rainman's picture

This news leaks nearly 5 months after the Flash fact and at the 3rd quarter time out so as not to disrupt the magical "Recovery September" upflow. All a coincidence, of course.

Or maybe waterboarding the W&R crew to take the fall took longer than projected. 

iota's picture

Scapegoat, what!


Ragnarok's picture

If true, then these are the last desperate throws of a corrupt and bankrupt system.

Cognitive Dissonance's picture


I suspect there are plenty of desperate throws, grabs, lurches and projectile vomiting left in this corrupt and bankrupt system.

Take a stroll down American economic history if you wish to see what's coming round the corner. We ain't seen nothing yet. We're just beginning to separate the liars from the pathological liars from the sociopaths from the criminally insane from the hidden hands.

I would say we're only now turning the page to the middle of the novel where things begin to get hot and heavy. We've got a long way to go before revolution. See, it isn't about whether you and I are ready. The question is this, is the butcher, the baker and the candle stick maker ready? Or to update this a little, is the school teacher, the nurse and the office worker ready yet?

I think not. They still have plenty of false hope and denial to burn through. As long as they'll listen to the "Change you can believe in" meme, or whatever both parties come out with in 2012, nothings going to happen. It's only when they no longer believe in hope and change, only then will they pick up a rock and a stick and beat a new system out of the old one.

Cammy Le Flage's picture

We're just beginning to separate the liars from the pathological liars from the sociopaths from the criminally insane from the hidden hands.


CD - Is that even possible in a realistic world?  Great description.

euclidean's picture

OK, so this might not be the cause of the Flash Crash as we know. But on a stranger sidenote-

If the SEC report does not name the party (assuming it 'is' W&R), how certain are people that W&R are the ONLY ones to have traded E-minis this way? That is how can ZH and Bloomberg nail W&R as the single entity?

Say for instance W&R had prior suspicions of a market top as they might be screen whores keenly interested in flagging trends in realtime, so went into May with a short bias. Even if it was a covering short trade while long from the previous rally. End of April was enough of a signal to sensibly short equity indexes.

When things went bad quickly theirs wouldn't be the only eyes glued to an attractive short. But why are they the 'only' ones singled out? I don't get this bit - what was so particular about W&R that stands out on it's own? They were on the ball from what I can see.

tip e. canoe's picture

"But why are they the 'only' ones singled out?"

"Oh my gosh Toto, I don't think we're in Kansas anymore!"

espirit's picture

+1 - Very good reply C.D.

They have yet to struggle with the possibility that their retirement entitlement may not be there when they retire. Nobody cares but for themselves anymore, so it will only happen when the majority are on the down & out. So many will have gone before them, but it is planned not to happen all at once.

tmosley's picture

It's funny.  There's this feeling in the air that has gotten a lot stronger over the last few days.  It's like that feeling when you had a few too many, and you head to the bathroom, and you know you are about to throw up, but you don't want to.  You really don't want to.

Once it starts, there won't be any stopping it.  It'll just keep coming out, until it's all there in the toilet bowl that used to be the American economy.

Dagny Taggart's picture

That is an apt analogy. I usually puke after looking at my portfolio on POMO mornings. Really. It's a new eating disorder, Front-Running with the Fed.

New_Meat's picture

what is keeping me so sveldt.  Gotta keep that Rusty away. - Ned

curbyourrisk's picture

Ya know what.....If the SEC blames them for wiping out $850 billion in equity in a matter of hours.....  Where will the fines be??  What about some prosecutions???  I know it was not their fault...but if the SEC is going to lay the blame at their feet...they better do something....  Othwise they are just showing they truly are impotent...



DaveyJones's picture

porn addicted eunuch. Kind of somes up the vigor and vitality of our system

bigdumbnugly's picture

spineless eunich geldings 

Problem Is's picture


Best of the week. Nobody is topping that one by Friday closing, curby...

EscapeKey's picture

Hey, SEC enforcers, look over there while we put som money in your back pocket.

DarkMath's picture

When does the SEC ever go after the big guys? They left Bernie Madoff alone but caught Tyler. And guess what we're better off for it. Bernie got his in the end (pun intended) and so will the others.

ZeroPoint's picture

You can't make policy recommendations based on complete and utter bullshit. That's why there's none to be had.

We might as well go back to a 19th century style trading system. It would be onerous bringing bushels of wheat to market, but at least the HFT Matrix wouldn't be fucking over your trades.

DaveyJones's picture

and the little guy could make some bread

TheGoodDoctor's picture

Well you know it's gonna get stranger, so let's get on with the show.

Turd Ferguson's picture

"The bigger the lie, the more likely it is to be believed".

This is Propoganda 101, boys and girls.

Hush now. Shhhhh. The sheeple are sleeping.

WaterWings's picture

Hey, Mary, check out this new tranny material I found.

EscapeKey's picture

Does anyone have some SEC email addresses we can send porn to?