August volume for CME Group compared to the same period last year was down by 40%. That’s not a statistic that sits well with an industry that has grown, almost non-stop, for a few decades. And it certainly shines a harsh light on underlying doubts and troubles within the futures and trading arena.
That said, futures and options volumes already were off. From January through June this year, compared to last, global volume was down about 10%, judging from statistics kept by the Futures Industry Association. But some funny things have happened during these post-June periods: MF Global and PFGBest, two futures brokers that not only went bankrupt, but took supposedly protected customer seg funds with them. MF Global declared bankrupcy on Oct. 31, 2011, while PFG’s 20-year fraud was exposed on July 9, 2012 (see “In PFG fraud, everyone loses — except the lawyers”). These events, in addition to low interest rates and a traditionally lighter summer trading season, added up to this huge volume drop.
The biggest volume losers were stock index futures, off about 58% from the previous period last year. Interest rates were down about 41%. Not surprisingly, especially because of parched Midwest crops, agricultural contract volume was up slightly.
A couple of months ago I said the industry needed to take a gut check on bad behavior and practices that might be archaic in this revved up, electronic-trading global world. Slowly but surely some changes are being made, but perhaps not enough. Traders seem to be voting with their business and either standing aside or trying other products. This isn’t to say other markets are safe. It’s apparent the futures regulators have fallen down on the job, but no regulator is immune to the plight of scandal and poor oversight. Bernie Madoff practically gave the Securities and Exchange Commission a map of his misdeeds before action was taken; the Office of the Comptroller of the Currency showed a shocking lack of oversight during the money laundering scandal of HSBC and others, as well as missing the Libor fixing scandal by Barclays in London. And let’s not forget the Federal Reserve and the banking crisis from 2008 onward. So regulators in the United States and yes, globally, have nothing over the Commodity Futures Trading Commission, National Futures Association or exchange regulators. In fact, investors and traders today might as well adopt a “buyers (and sellers) beware” attitude when entering the market anywhere. Until the regulators, brokers and exchanges realize something has to be done to regain investor trust, a 40% drop in volume might seem like a good day in the markets.
Which brings me to the U.S. presidential election (see “Energy’s countdown to the election”). Although the outcome of the election in November may not have a great impact on energy market prices, it certainly will have an impact on policy going forward — in all markets. I’m an editor, but I also have money in various funds, including a 401(k). I empathized with a friend the other day who noted that her investment funds took a huge hit during the financial crisis, and yet it still seems nothing has changed and no one has been held accountable. In fact, Republicans want to rescind most of the Dodd-Frank legislation, which makes me wonder where they’ve been the last five years. Further, “starving the beast” is their policy on funding regulatory agencies. I’m certainly not advocating an open checkbook, but there has to be a thoughtful and practical regulatory structure rather than a scorched earth policy. As an investor, I’m furious that no bankers who helped push the financial system to the brink are in jail. As a market observor, I’m astounded Jon Corzine of MF Global still roams freely one year after his firm’s epic downfall. And the fines on bankers’ bad behavior are almost laughable and clearly seen as just the cost of doing business.
The White House resident does makes a difference. If the financial markets are to survive and once again thrive, thoughtful regulations need to be adopted and enforced to strengthen the system and, more importantly, earn back public trust.