February 29, 2008
Whacky Wheat Whipsaw
MF Global Says Unauthorized Bets Lost $141.5 Million
“Wheat rose the most ever yesterday [the 27th] to the seventh record high this month, then fell by the exchange-imposed daily limit before rising again by the maximum allowed. The 25 percent rally from the day’s low to its high was bigger than all but seven annual price increases for wheat since 1973.”
Limit up, limit down, limit up all in one day… yeah, I can see someone losing $141,500,000 in that environment.
Cat: | Time: 11:45 am (utc+8)
February 29th, 2008 at 8:12 pm
It’s not a rogue trader, it’s their system not accounting for volatility.
I’m not a Taleb fan, but that fits into his theories.
Traders for any firm should be required to learn the history of their markets - 30 years before, 60 years before - so they can see how quiet leads to noise leads back to quiet. And bull market periods (in commodities, like now) run for 10+ years.
February 29th, 2008 at 8:34 pm
bob: We don’t know the details on these trades yet (should at some point since that’s a publicly-listed firm), but it sounded like he put on trades way larger than he should have.
February 29th, 2008 at 10:23 pm
It seems to me he was trading through retail account(s) - his own or/and his customers. He was occupied as a broker not as a trader. But I wonder how he managed to disrupt the limits so far on retail accounts even if their risk mgmt. system for retail account was not working.
February 29th, 2008 at 10:34 pm
Markus: Just like Jerome’s case, it will be fascinating to review the details when they’re released.
March 1st, 2008 at 8:51 am
Limit down to limit up is extraordinary enough, but consider that the limits on wheat were vastly expanded in only the course of 2 weeks before the MF fiasco. Usually at .30 cents, limits at the end of the preceding week were .60 cents per session, then were lifted to .90 for the Monday and Tuesday sessions, and 1.35 on Wednesday.
March 1st, 2008 at 9:44 am
microcap: Good point, and the changing of the limit up / limit down levels may have played a role in the systems’ failing to catch on to this guy as he got whacked over and over.
March 1st, 2008 at 11:17 am
@Bob: Taleb is awesome. The traders should be required to trade their own money through a full market cycle before they are handed OPM. only then, maybe, they will appreciate how to handle risk.
I am getting so fed up with the idiots (including the hedge fund manager that lost 80% of my money within few months) that do not understand that the return OF your money is much more important than the return ON your money.
Taleb should be required reading for all money managers.
March 1st, 2008 at 11:54 am
Born2: You’re giving hedge funds your money to lose and won’t part with $20 for the Box Ideas? ;-)
March 1st, 2008 at 1:02 pm
my intent was to diversify the asset classes not to lose the money :)
at any rate, 1) i think i do better than the box — all my trades and positions are listed in real-time on my blog — and 2) most of the box ideas go against the primary trend which is really problematic for a trend follower like me.
March 1st, 2008 at 1:45 pm
Born2: By primary trend, do you mean weekly trend? Many have asked if I could improve the quality of the ideas by picking only those that are in the direction of the weekly trend, and the truth is I don’t know because I haven’t tested it, but it’s definitely something I’ll look into.
March 1st, 2008 at 11:11 pm
i look at the daily candles but using at least 2 years worth of data. I then look at the lower lows and higher highs on that chart as per Trader Vic’s definition of a trend. It is pretty much self evident when you look at it.
Most of the time it the primary trend ends up corresponding with the direction of a long term moving average such as the 200 day ma.
For example my most recent trade in FLIR is in a short term down-trend but in a long term uptrend. I added to my position as it bounced off the 200 day ma, printed a beautiful long-tail candle and held above the most recent lower low. All in one day. I’ve had the initial position for months and I wouldn’t be surprised a year from now if i am still in the stock. My volatility-based stop level is under $24 and seems safe for the time being.
Most of the time the weekly trend reflects the same information. I used to use the weekly trend till one week in August of 2007. I was holding a large position in CHTR that I had accumulated over a year. When the Bear Sterns funds imploded this stock took a huge dive for some reason. I was waiting for a confirmation on the weekly chart. By the time the weekly candle closed the stock had dropped 50%. Lucky for me I exited with a 50% drop from the peak because it proceeded to lose another 70% from that point.
Since then I stick to the daily candles for trading though I look at the weekly charts as a confirmation when I first initiate a position.
March 2nd, 2008 at 10:27 am
Um, that’s American Wheat, right?
March 2nd, 2008 at 11:58 am
@Born@: Thanks for you explanation.
@jtaylor: It’s this one.
March 3rd, 2008 at 7:01 am
i got whacked $40k that day on 10 contracts.
got auto-liquidated on a short on the spike up. stops were in place but fills had so much slippage.
March 3rd, 2008 at 7:52 am
andrew: In wheat? Sorry to hear it. That’s one scary chart when thinking about slippage on the spike.