You think you've ever had a bad day trading????
It took only seven hours early Wednesday for a trader at MF Global Ltd. to make bad bets on the direction of wheat prices that cascaded into $141.5 million in losses at the brokerage firm and exposed another breakdown in Wall Street's risk management.
Yesterday's announcement of the ill-fated trades was an embarrassment for the Bermuda-based futures and derivatives firm, which suffered a 28% drop in its share price. It was the steepest decline since MF Global was spun off last year from hedge-fund giant Man Group PLC, and the blowup raised questions about how one of the largest customers on several futures exchanges could have left itself so exposed to a single trader's bets.
MF Global identified the trader as Evan Dooley, who worked in the firm's Memphis , Tenn. , office until he was fired for having "substantially exceeded his authorized trading limit."
In an interview, the 40-year-old Mr. Dooley, who goes by his middle name, Brent, blamed the trading loss on the computer systems he was using. That system "failed on a lot of things," he said, including problems in "setting limits." He declined to be more specific.
MF Global insisted that the breakdowns resulting in the steep loss were isolated and have been fixed. But Kevin Davis, the brokerage's chief executive, acknowledged that existing internal controls could have stopped Mr. Dooley's trades from being processed -- but were turned off in a few cases to allow for speedier transactions by brokers at the firm who traded for themselves or took customer orders by phone.
"This is an absolutely awful event, but we believe it was an aberration in our risk controls. We believe that we have fixed it," Mr. Davis said. The firm has hired FTI Consulting Inc., of Baltimore , to review its risk-management procedures.
Mr. Dooley, who has spent more than 15 years in the rough-and-tumble business of commodities trading, had just one customer, and that person hadn't done any trading business with Mr. Dooley in "some time," Mr. Davis said. But the trader was allowed to process trades for his own account through MF Global, which collected commissions on those transactions. Such arrangements are common in futures trading, even though the brokerage firms essentially must use their own capital if traders can't afford outsize bets that go wrong.
Mr. Dooley, who joined the firm in November 2005, was betting that wheat prices would fall from their recent highs, according to a person familiar with the situation. Wheat and other commodities have surged in recent weeks because of strong demand, tight supply and a cash infusion from investors.
Mr. Dooley entered into the trades between midnight and 7 a.m. Eastern time Wednesday, according to the company, which said he placed orders for about 15,000 to 20,000 futures contracts, including March contracts and "a number of other contracts."
The trades weren't made from the brokerage firm's Memphis office. Mr. Dooley often traded from his home in Olive Branch, Miss. , where he lives with his wife, according to Mr. Dooley's father, Evan Dooley. "He's not a big trader. He's not a rogue trader," said Mr. Dooley after speaking with his son several times yesterday. "He's a day trader. If he made $1,000 a day, that was a good day."
MF Global's risk-management procedures include "buying power controls" that are supposed to flag big or risky trades that might expose the firm to potential losses. But those internal controls were sometimes turned off at the Memphis office and possibly other locations in order to speed trades. The surge in commodities-trading volume has created pressure on brokerage firms to keep up.
CME Group Inc.'s Chicago Board of Trade handled Mr. Dooley's orders. By Wednesday morning, though, wheat prices were moving sharply higher, meaning that Mr. Dooley was suffering losses that far exceeded the balance in his own trading account. Since his account was depleted, MF Global was forced to step in and fund the trader's losing position.
"It happened very quickly," Mr. Davis said in a conference call. Mr. Dooley didn't have the capital "to support even a fraction of his positions."
Some said MF Global's buying binge pushed wheat prices higher and fueled heavy trading Wednesday. It took several hours to undo Mr. Dooley's trades, but Mr. Davis played down their role in price moves. Floor trading of futures occurs in the daytime, while electronic trading through CME is during the day and from 6 p.m. to 6 a.m. Central time.
The MF Global mess was "certainly the main thing" that caused the market to gyrate Wednesday, said Vic Lespinasse, analyst for Illinois Grain. The most actively traded May wheat contract surged by the CBOT-imposed limit of $1.35 a bushel.
Covering Mr. Dooley's positions cost MF Global $141.5 million in cash, or about $80 million on an after-tax basis. That is equal to about 6% of the brokerage firm's capital -- and exceeds the company's net income in the fiscal third quarter ended Dec. 31.
Some of the loss might be recovered from insurance companies or mitigated by reduced bonuses at the firm, but getting the money from Mr. Dooley isn't likely. The trader "doesn't appear to be terribly long of assets," Mr. Davis said.
National Futures Association records show no prior regulatory problems for Mr. Dooley. It isn't clear if he will face disciplinary action from regulators stemming from his wheat-futures trades. The Commodity Futures Trading Commission, which regulates U.S. futures markets, is looking into the situation. In a statement, the CFTC said the problem "appears to be an isolated event."
Outside of work, Mr. Dooley liked to go fishing, according to his father. Richard Gunter, who lives across the street from a brick house in Eads, Tenn., where Mr. Dooley used to live, recalls seeing the trader leave for work around 6 a.m. or 6:30 a.m. With the rise of electronic trading, though, Mr. Dooley could trade nearly 24 hours a day.
MF Global's shares fell $8.09, or 28%, to $21.19 yesterday in 4 p.m New York Stock Exchange composite trading. That was the steepest decline since the company went public at $30 a share.
In other commodity news:
CRUDE OIL: Futures soared to another all-time high above $102, bolstered by the dollar's slide to new lows. Crude oil has risen in 12 of the last 15 trading days, as a weak dollar pressures oil exporters to raise prices and draws investment funds into commodities. Light, sweet crude for April delivery settled $2.95, or 3%, higher at $102.59 a barrel on the New York Mercantile Exchange.
SILVER: Prices rose, supported by anticipated lower interest rates and higher oil prices. Investor interest in silver is increasing as some in the market think gold is "overdone" and some have been selling gold to buy silver, especially after the yellow metal broke its 1980 high, said Don Tierney, precious-metals analyst with B&C Trading. On the Comex division of the Nymex, nearby March silver rose 43 cents, or 2.2%, to $19.6400 an ounce after reaching $19.845, the highest front-month price since November 1980. Most-active May silver gained 37.7 cents to $19.710.
