A big fish in a small pond makes for a easier target Tuesday, March 04, 2008
According to The New York Times, the trader at the centre of MF Global's recent trading scandal, Evan Dooley, often entered into about 15,000 wheat futures contracts, the equivalent of around 10% of the market for these kind of contracts in any given month.
Whilst many of these trades will have been to close out opening positions, and not necessarily imply large net positions, such flow size marks out a trader in a market. As such, they are likely to become a target for other firms who will observe activity in the hope of profiting from following or countering the flow.
A high trading profile normally runs contrary to many traders instinct - most prefer not to reveal anything about their trading intentions/activity to other participants lest they utilise that information against them. However, some information leakage is inevitable when you are such a large part of a market and sometimes a trader in such a position will seek to push a market in a particular direction by "weight", real or perceived.
Dooley took large short positions on Tuesday evening, following Monday's wheat price shooting up by 25%. He was evidently betting that the price had overshot its' "natural" level. However, it appears likely that several other firms decided to "squeeze" him by pushing back against the falls in price, thereby allowing them to profit when MF Global was forced to close the positions.
Of course, had they failed then Dooley could have equally been sitting on equally sizeable profits at which point he would have been regarded as a hero and trading genius, albeit with a slight smack on the risk for having taken such large bets.
Labels: controls, internal controls
posted by John Wilson @ 8:20 AM Permanent Link
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MF Global hit by unauthorised trader Friday, February 29, 2008
My old firm, MF Global, is the latest to be hit by a large loss ($141m) as a result of unauthorised trading by a wheat trader in its' Memphis office. The news caused the shares to fall by over 25%.
Apparently the trader had shorted the market and was hit when unprecedented volatility in US wheat markets, with prices falling 11 per cent but then jumping almost 20 per cent to a record $13.34½ a bushel in just three minutes. This against a backdrop of prices rising by 25% on Monday.
The CEO commented that MF Global had relaxed system trading control limits because they made trading desks less efficient when many customers were placing orders - these have now been restored.
Whilst I don't have any insider information as yet on the specifics of how this happened, one can imagine a number of possible situations, including ones in which a trading desks feels its' profitability is being impeded by "unreasonable" controls. For instance,
- Limit restrictions may mean a desk can't accept all the customer orders coming in when the flow of orders are all in a particularly direction eg all buy orders. The desk may contend it can easily lay these off but the sequencing of order means they "temporarily" breach limits.
- In a phone broking environment, sales traders have to record orders manually. Whilst these should be immediately entered into systems during the call, sometimes when the phones are going crazy sales traders can revert to using their own paper blotters to jot down orders and resultant positions, thereby circumventing limit controls .
- Often orders can be processed without allocating them to an account pending client allocation instructions e.g. a client has 10 accounts and hasn't specified which account(s) to allocate the trades to. Time limits may operate on how long orders may be unallocated and likewise the number/size of unallocated orders may be limited. However, at busy times, it can be perceived as more important to get the order into the market and worry about the details later. In this situation a trader could enter orders for their own account but conceal them under the guise of unallocated client orders
UPDATE : MF Global shares continued to take a battering when the US market opened and at one point they were 50% lower than prior to the news at $14.22, before staging a rally. This will have financially hit many of the staff and Directors, many of whom hold shares and options, albeit many will probably see it as a buying opportunity.
Labels: controls, internal controls
posted by John Wilson @ 9:15 AM Permanent Link
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