Mutual Fund Eyed In Market Swoon As Universa’s Taleb Responds

May 17 2010 | 12:13pm ET

While much suspicion has swirled around hedge funds—and even a prime brokerage—as the cause of the precipitous drop in the stock market 11 days ago, the main culprit may have been a traditional old mutual fund house.

Waddell & Reed Financial is the unidentified firm cited by Commodity Futures Trading Commission Chairman Gary Gensler as the seller of a huge number of Standard & Poor’s 500 Index e-mini contracts, Reuters reports. Gensler said last week that “one large” seller’s “bona fide hedging transaction,” was responsible for about 9% of the volume traded during the sell-off and into the recovery between 2:40 p.m. and 3 p.m. on May 6.

Overland Park, Kansas-based Waddell started selling about 10 minutes before the Dow Jones Industrial Average began its nearly 1,000 point swoon, finishing up at about 2:51 p.m., during the Dow’s equally rapid recovery, Gensler said.

Earlier suspicion had centered on hedge fund Universa Investment’s $7.5 million options trade and on prime brokerage Terra Nova Financial. Terra Nova denied that it had anything to do with the market plunge; a Universa adviser argued that searching for the immediate cause of the brief crash was missing the point entirely.

“When a bridge collapses, you don’t look at the last truck that was on it, you look at the engineer,” Nassim Nicholas Taleb, the well-known “Black Swan” economist and adviser to Santa Monica, Calif.-based Universa, told Bloomberg Television. “You’re looking for the straw that broke the camel’s back. Let’s not worry about the straw; focus on the back.”

Taleb said he was not sure what role, if any, Universa’s trade played in the short-lived crisis.

“I have absolutely no idea what Universa did, and I’m not connected, so I cannot provide an answer as the Nassim that is connected to Universa,” he said.

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