CBoT mis-trade may have been deliberate
Jim Kharouf
Chicago Board of Trade (CBoT) and regulators are investigating whether a trade that sent the mini-Dow contact spiralling on the morning of 3 July was intentional or a mistake.
CBoT officials said they are working internally as a self-regulatory organisation and with Commodity Futures Trading Commission (CFTC) in examining a major sell order that sent the September mini-Dow index futures down 584 points between 9.38 am and 9.39 am. There was also a 576-point drop within that minute in the December 2003 mini-sized Dow futures contract which, prior to that, was trading in a narrow 31-point range.
Initially, industry sources believed it was a "fat finger trade" or errant trade. But last week, exchange officials met to piece together just what happened. Bryan Durkin, CBoT senior vice president of trading operations, told FO Week that the review was still ongoing and that nothing has been determined yet. However, he hinted that the trade or trades could have been intentional.
"We're still in the context of a review and I don't want to suggest that someone has acted inappropriately or recklessly," Durkin said. "But it very well could be these orders were fully intended to be entered into the market. And we just need to confirm people's awareness and understanding of risk management when placing orders and the impact they have on the overall performance of the market."
Exchange officials would not disclose which firm the trade came from and declined to say how many trades needed to be cancelled as a result of the price drop. Durkin said the exchange handled the incident according to its set procedures.
"As difficult as these situations are, the processes and procedures in place performed efficiently," Durkin said. "The goal here was immediacy in identifying the problem and a quick response. And I think we did a very good job of being alert to that fact and communicating with the marketplace."
One FCM executive said he is not surprised to hear that the trade may have been intentional and slipped by the FCM's risk management controls.
"The systems we have today are far more sophisticated than the ones we had with the swinging elbow on Matif," he said. "Theoretically, I could have a huge account to trade a huge number of contracts. But all that would still have to go through channels. And what happens before a holiday? People take off and then you're dealing with the second tier guys."
Russ Wasendorf, chairman and ceo of Peregrine Financial Group in Chicago, told FO Week that such trades have a ripple effect on other contracts such as the S&P 500 futures contract at Chicago Mercantile Exchange. Whether the trade is errant or intentional, he said the broader damage to market participants should be examined by CFTC.
"They adjusted the trades for those at the Board of Trade but what about the people trading the S&P contract on the Merc?" Wasendorf said. "Those people are kind of left out to dry with no recourse. I should think this would cause some alarm at the regulator level. They should ask if they have provided the kind of regulatory procedures that would prevent this type of thing from happening. It obviously affected the integrity of the market."
Attempts to reach CFTC about this incident and regulatory oversight were unsuccessful by press time. |
