Posted on 02/28/2008 8:59:12 PM PST by DeaconBenjamin
A sole wheat trader has triggered losses of $141.5m (£70.9m) at MF Global after a failure in the commodity broker's trading technology allowed him to breach trading limits.
The incident highlights the fragility of financial trading systems in fast-moving and volatile markets such as wheat
MF, which was spun out of London-based hedge fund manager Man Group last summer, blamed the losses on a failure in its systems - which it says have now been corrected.
The trader, Evan Dooley from its Memphis office, was fired as soon as the losses, which were run up on Wednesday morning, were discovered.
The incident highlights the fragility of financial trading systems in fast-moving and volatile markets such as wheat, particularly at times of heightened nervousness in the financial system.
Mr Dooley is understood to have taken a large short position in the wheat futures market on Tuesday night, which turned sour when the markets opened on Wednesday morning, as volatility and prices jumped to record highs.
On the CME, soft wheat futures dropped an initial 11pc on news of MF Global's losses, but rebounded by 21pc within five minutes.
Shares in MF Global fell $4.97 to $23.42 as investors worried whether the $141.5m might be just the tip of the iceberg.
But chief executive Kevin Davis stressed that it was an isolated incident, calling it an "aberration" in MF's risk-trading systems, which he believes have now been fixed.
He also said the company will introduce limits on positions taken by all of its traders and customers, including professional traders who have not previously been subjected to MF's automatic close-out system that prevents unsustainable positions from being built.
My BS meter is off the chart. I have written code for financial systems, and I can't believe this system was that sloppy. Since this is the third "rogue trader" in a few weeks, it seems more likely that these are people who are trading with at least a implicit approval of management, but are getting caught due to the recent volatility in the markets. This is just a cover story to placate shareholders and/or regulatory agencies.
The escaped goats.
Not if he had a short position.
I wonder what his resume is going to look like.
All three of the "rogue traders" were involved in back end operations in their company's inventory, not in client accounts. Many brokerages and exchanges have an inventory of stocks/bonds/etc which they hold, presumably so their customer accounts can buy from this inventory. Market makers hold an inventory of stocks to provide liquidity so that each buyer does not have to be connected to each seller. It is from these types of inventories that all three rogue traders operated. This makes me very suspicious that management winked at the trading.
Hillary would have made a 10,000% profit.
Piker! Small fry! Amateur! Odd-lotter! A hundred and fory million in futures, bah, he’ll never become the CEO of Citibank unless he starts to set his sights a little higher!
By often I mean nearly ten percent.
Resume Generating Event
I’ll bet the wheat traders’ bonuses will be kind of crumby this year.
If a price can drop 11% and rise 21% in five minutes, any system safeguard would just have to stop trading.
Remember, commodity positions are typically “leveraged” ten to one - 10% cash, 90% borrowed money - so even a 1% change in price can explode your position.
The good news is that trading disasters like this are “zero sum.” Someone lost $140 million. Someone won $140 million. And someone, the smartest guy in the room, took a couple percentage points for booking the deal.
Nope.
Trader at his next job: "Would you like fry's with that?"
Hmm.
This wasn’t supposed to be possible any more.
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