1997 BMW Z3 Check engine code P0500 vehicle speed sensor

I recently purchased and am needing to smog a BMW Z3 but the check engine light is on. The trouble code displayed is "P0500 Vehicle Speed Sensor" Is this referring to one of the four wheel speed sensors? Is this a code that will cause the car to fail an emmisions test? When I clear the check engine light, I can drive the car all over town and the light stays out. But after the engine is turned off and then restarted, the light comes on again after driving only a short distance. Concerning the four wheel speed sensors, I have noticed that on the inside of the drivers side front wheel, there is a sensor of some kind that is similar to one of the wheel speed sensors but it is only on that wheel. It plugs in directly beside the wheel speed sensor and follows the same path around the strut, it's two wires supported by the same clips as the wheel speed sensor. It is plugged in to the system via a connector but the other end is not plugged in or mounted anywhere. The wires for it are just sort of bundled up and hanging from one of the plastic clips that are mounted on the strut. The sensor end of this gadget appears to have a piece of plastic broken off. It looks like someone may have broken it then just rolled it up and hung it in the clip inside of the wheel

by the strut. I have checked the parts lists and every where else I can think of but I cannot locate or identify this part. I removed it and took a picture of it that I have included with this inquiry. Is this thing important? could this be causing the problem?
Thanks,
Dave.