When your FCM melts down: A CTA’s perspective

My poor broker. I’ve worked with this guy for over two years. We talk nearly every day. He understands all my trading needs and always goes the extra mile. He was a VP at MF Global who worked his way up the ladder. He’s invested over a decade of his life with his IB at MF Global. Now everything he’s worked for is gone. He doesn’t know his future, he won’t be receiving any commission or pay checks from MF Global, but worked diligently to help his clients. He showed a lot a character throughout this situation.

In exiting all these positions, many brokers would just put in market orders. With futures, especially in liquid markets, that’s not necessarily a bad thing, but with options, it could be lethal. What is one person’s catastrophe is another person’s opportunity. There were a lot of attorneys that made money on Enron demise. There were traders that were getting some bargains that day. Fortunately for me, none of the markets I was trading in were having big moves, the damage would be contained. The broker carefully worked out of each position, and there were dozens of them, to the benefit of the accounts that I manage. He didn’t panic.

Now the information starts coming out that that there is approximately $600 million in segregated funds that are missing, and that is why the last minute sale of the firm fell through.

MF Global Chairman and CEO Jon Corzine, who made the Eurobond bet that created this whole mess, was trying to sell the futures unit over the weekend. The deal apparently fell through when Interactive Brokers’ accountants found the discrepancy in seg funds.

By Tuesday, Nov. 1, all my accounts are sitting in cash or were being settled up from the previous days activity. Those customers that didn’t exit out on Halloween were now stuck with no stops. A week later, those accounts that had positions on were moved to random FCM’s with about 60% of the funds to cover the positions. If the client couldn’t add monies to these new accounts, then those positions might be exited. What about those accounts that went negative during this time because the stops were cancelled? I’ll bet none of them are going to write a check to MF Global to cover those losses.

The most logical thing that could have been done on Monday, Oct. 31, was to just instigate a mass liquidation throughout the day. It’s not like everybody was sitting on just one side of each market. Probably would have been a wash and would have left everybody in a cash position at the end of the month. This would have created a clear line of demarcation and would have avoided the messes that occurred later in the week with some accounts, those with open positions, to be moved to other FCMs by the CFTC.

In the future I’d make these suggestions:

  • Suggest to clients to place money at FCMs that only do execution. Not firms trying to build the next Goldman Sachs.
  • If the firm does go through a REFCO/MF Global type of bankruptcy situation – if possible, liquidate all positions immediately.
  • Suggest that all client monies get wired out at the earliest possible moment.
  • Have relationships with other FCMs. Diversification in FCM contacts is a good thing. You just might need them on short notice should another meltdown occur.

Hopefully we’ll learn and the necessary lessons from this debacle. Obviously the goal is to avoid being in this situation in the future.

Robb Ross runs White Indian Trading Co., and developed its Stairs trading program (see "Ross: White Indian and rubber chickens," August 2010). He is an experienced programmer and system developer, having worked at both Microsoft and NASA.

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