Hedge Fund Role Eyed In Thursday’s Market Meltdown

May 11 2010 | 1:30pm ET

Were hedge funds responsible for Thursday’s market madness after all?

According to The Wall Street Journal, an otherwise-innocuous $7.5 million options trade by hedge fund Universa Investments may have triggered the tumultuous 20 minutes period in which the Dow Jones Industrial Average plunged nearly 1,000 points, only to quickly rebound.

While a trade for 50,000 options contracts on the Chicago markets is not uncommon, coming on top of worldwide market uncertainties and continuing concerns about the European debt crisis, it may have unleashed a tidal wave that briefly swamped the markets.

Universa, the $6 billion Santa Monica, Calif., hedge fund best known for its relationship with economist and “Black Swan” theorist Nicholas Nassim Taleb, placed its trade at 2:15 p.m. Eastern time through Barclays Capital. The move caused Universa’s counterparties, among them Barclays itself, to sell some shares to offset the risk of the hedge fund trade, according to the Journal.

With the market falling anyway, those sales are likely to have increased, causing high-frequency trading hedge funds to step aside, as the huge volumes slow transactions. But those hedge funds are critical to market liquidity, according to the Journal, and their inaction only led to further trouble.

The volume was some of the highest hedge fund had ever seen. Two Sigma Investments said Thursday was its busiest day, in terms of volume, ever, the Journal reports.

Most hedge fund emerged from Thursday’s mayhem relatively unscathed. One London hedge fund manager told Reuters, “From what I’ve seen so far, most guys were OK—they lost 1% or made 1%.” Some, however, did substantially better.

Moore Capital Management’s Greg Coffey turned a tidy 1.5% profit last week thanks in part to Thursday’s volatility, according to Reuters. HSBC Alternative Investments’ Tim Gascoigne cited a “long volatility” hedge fund that enjoyed a 10% return last week, while another fund boasted of a 4% return on Thursday alone.

Still, most hedge funds seemed to steer clear of the carnage between 2:40 p.m. and 3 p.m.

“It’s not our style to do something in such high volatility,” another hedge fund manager told Reuters. “Hedge fund managers will not necessarily want to get involved if they don’t know why it happened.”

Another, Martin Currie’s Tom Walker, told the news agency, “I don’t know who managed to buy Procter & Gamble 37% down… but we didn't.”

Meanwhile, the heads of the major U.S. exchanges met yesterday with Securities and Exchange Commission Chairman Mary Schapiro to make sure it doesn’t happen again. The big markets are working on new circuit-breaker thresholds that will determine when trading will be summarily stopped. A lack of synchronization between the major exchanges and electronic exchanges has been suggested as one of the causes of Thursday’s problems.

Bats Global Markets, CBOE Holdings, Direct Edge Holdings, International Securities Exchange Holdings, Nasdaq OMX Group and NYSE Euronext are to submit their plans to regulators this week.

In Depth

Financial Industry Blockchain Consortium R3 To Open-Source Platform Code

Oct 20 2016 | 9:03pm ET

Bitcoin's blockchain technology has spawned a flurry of activity among fintech startups...


Hedge Funds Swarm Into Palm Beach

Oct 27 2016 | 2:32pm ET

As the first flakes of snow fall on New York's northern suburbs, Dan Weil of South...

Guest Contributor

Hedge Fund Marketing – Tips for Your Initial Sales Meeting

Sep 29 2016 | 5:46pm ET

There are two main goals a hedge fund should have for an initial in-person sales...