Chaos follows MF Global filing

Futures broker MF Global (NYSE: MF) officially announced it had filed for chapter 11 bankruptcy protection today prompting swift action from related businesses throughout the financial sector. Even before the filing was officially released by MF Global, some bourses already were restricting MF Global customers to liquidation only. Among the exchanges restricting MF Global customers were Singapore Exchange (SGX), CME Group and the London Metals Exchange (LME).

The result was confusion and, in many cases, panic from traders suddenly barred from the trading floor. “I was on the floor earlier today and Bryan Durkin, chief operating officer at CME Group, was down there with a couple other fellows, and basically you have all these people who are locked off the floor and it’s a zoo. These are people who may have open positions,” says Marc Nagel, chief operating officer at Dorman Trading. “This is just a joke, to tell you the truth. I don’t know whose fault it is, but this is not an orderly transition of business. In our business, that is normally the standard, and in this instance, it is not.”

Scot Billington, principal of commodity trading advisor Covenant Capital called the MF Global bankruptcy filing a pain in the ass but added it could have been worse.

Billington operates a long-term trend following program and didn’t have any orders to execute, which was a good thing because his executing brokers could not accept MF Global give-ups.

That meant he would have to go directly to MF Global for execution because all MF Global accounts were on liquidation only and a filling broker giving up to MF Global would not have visibility into those accounts. “Those (MF Global) lines were pretty jammed up today,” he says.

Covenant received a notice from JP Morgan that stated they were not accepting any more give-ups. This could have caused a huge problem for managers without ready access to the JP Morgan trading desk. “It could have been a major problem,” Billington says, “All of the regular channels of trading were clogged.”

Still the filing cost Covenant business. “We had a lot of customers that just closed their accounts,” Billington says. He understands that reaction but adds that there is no guarantee they will return especially those customers new to futures. "We haven't done anything wrong," he adds, but that doesn't mean clients won't simply take their profits and simply avoid the space. Billington would have liked a smoother transition and positions moved out of MF Global into another broker.

Nagel added that Dorman had received numerous calls from firms and individual traders looking for a new trading broker. As some traders started looking for new brokers, some have went out of their way to advertise to MF Global traders. Just hours after the announcement, PFGBest sent an email blast with the subject line, “PFGBEST Offers a Competitive Alternative to MF Global.”

Other futures brokers reported last week following MF Global’s disappointing Q2 earnings report that accounts were shifting.

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