New 'Flash Crash' Theory: Report

OVERLAND PARK, Kansas (TheStreet) -- The latest media report claiming it has solved the mystery of the ''flash crash'' surfaced on Friday.

Reuters reported on Friday afternoon that it had internal documents from the CME Group(CME) , the largest futures and options exchange, showing that money manager Waddell & Reed Financial(WDR) was involved in the trade that led to a massive selloff in the market, with the Dow at one point falling almost 1,000 points.

Shares of Overland Park, Kan.-based Waddell & Reed were lower Friday afternoon, more than the financial sector's average decline. Waddell was down 5% on heavy volume, with 3 million shares trading, well above the average of 800,000 shares daily.

Earlier this week, The Wall Street Journal reported that a quant hedge fund, Universa Investments, could have been behind the mystery trade.

Reuters quoted the document as saying that on May 6. Waddell sold a large order of e-mini contracts -- one of the most liquid S&P 500 futures contracts -- in a span of 20 minutes. During that time, 842,514 e-mini contracts were traded. It was not clear how many of the 75,000 contracts quoted in the CME documents were sold by Waddell & Reed in the 20-minute meltdown, Reuters reported.

In congressional testimony last Tuesday, Gary Gensler, chairman of the Commodity Futures Trading Commission, noted that one sale was responsible for about 9% of the volume in e-mini contracts during the selloff.

Waddell & Reed put out a statement saying the report was much ado about ordinary trading business: "Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6."

Waddell & Reed said in its statement that it often uses futures trading to "protect fund investors from downside risk," and on May 6 it executed several trading strategies including the use of index futures contracts as part of the normal operations of its flexible portfolio funds.

Waddell & Reed said it believes it was "among more than 250 firms" that traded e-minis during the market selloff.

Reuters reported that the CME Group declined to comment on the internal documents, citing customer protection and said that e-mini contracts functioned efficiently in the market on May 6 and did not precipitate the collapse.

-Reported by Eric Rosenbaum in New York.

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