With wheat futures already experiencing unprecedented volatility, a rogue trader rocked the market on Feb. 27. MF Global acknowledged that a U.S. registered representative of the firm, trading Chicago Board of Trade wheat, exceeded his authorized trading limit and lost $141.5 million. The trader, Evan B. Dooley, was terminated immediately.
“You couple a perfect storm of cheap money and the most volatile and biggest markets of all time with larceny and you’ve got an ugly story,” says Tom C. Willis, longtime grain trader and vice president at Mesirow Financial Commodities Management.
MF Global CEO Kevin Davis said in a conference call the following day that certain MF Global retail order entry systems didn’t have “buying power control.” The risk management mechanism would not have allowed trades exceeding an account’s limits. Davis said, “Some offices do not have buying power control,” adding that the safety mechanism can make trading less efficient.
Davis went on to say that from now on, all retail entries will have buying power control and that MF Global will, “sacrifice some efficiency for safety.” He added, “It is embarrassing for all of us.”
Tom R. Willis, also a vice president and trader at Mesirow Financial Commodities Management, observed that “because MF Global wanted to provide the quickest and most efficient access to the electronic market, limits or safeguards were taken off the electronic system, which allowed this guy to take advantage of the situation,”
Wheat futures have experienced unprecedented volatility in recent months. The CBOT (CME Group), Minneapolis Grain Exchange (MGEX) and Kansas City Board of Trade (KCBT) have raised daily price limits in wheat. Current limits are set at $1.35. MGEX lifted its limit on its March 2008 contract. “I’ve been [trading] for 35 years…and almost every day or a couple times a week I see stuff that’s mind-boggling, and the most recent one is what happened last week in the wheat market,” the elder Willis says.
“[Dooley] picked wheat because it was flying around…Minneapolis wheat was $25 a bushel, and Chicago was $12 or $13,” the younger Willis says. “He picked wheat because he figured if and when [it] sold off and if he caught it, he’d make a lot of money quick. [But] when the market sensed he had accumulated a large position, he put in the top when he got out.”
Davis said liquidity in the wheat market also enabled Dooley’s trade.
“[That’s] a bit of a stretch,” the senior Willis says. “For efficiency’s sake, [MF Global was] circumventing their system to put the orders in quicker. It works until you have someone that notices that they can take advantage of the system, and that’s what happened.”
CME Group, the designated self- regulatory organization for MF Global, pointed out the following day that MF Global continued to meet its obligations and is a clearing member in good standing. The CFTC said it continued to be in close contact with the firm and CME Group, and that it already had been closely monitoring all of the U.S. wheat markets in light of recent volatility.
“The broader issue isn’t how he did it, it’s that it can be done at all,” the younger Willis says. “There are a lot of benefits to electronic trading, but [the downside is] it’s not a face-to-face transaction.” He adds, “The way those positions were liquidated was about as inefficient as possible. Most of the loss occurred with the way they liquidated the position. The vast majority of it was the idiot who pushed the button to get them out, driving wheat up $2. That’s what created the loss.”