Unlike the stock market, the futures market has all of its contestants directly in competition with one another; every contract is essentially a bet between two parties. In the wake of MF Global
(MFGLQ.PK) however, competitors stand unified in collective disgust, but more action must be taken. Here is the latest from the battlefield.
The CFTC is inept, and the CME is haplessly squirming, having punted on covering MF Global customers due to short-term shareholder obligations. After pouring through news articles, I want to encourage everyone to read Erin Arvedlund’s piece in Barron's
, "The Silver Rush at MF Global
." It’s a great take on just how viciously property rights have been stampeded in this process. Much of this sordid tale has come out recently when the Congressional hearings featuring Jon Corzine gave the story a well-deserved boost in the spoon-fed media. We broke this story early in Minyanville (see MF Global: Is This the Second Coming of Bernie Madoff?
) and we indicted all the right culprits—senior management at MF Global, the CFTC, the CME Group, and a little bank called JPMorgan
The Occupy Wall Street Movement
This group has gotten more heat, quite literally, than an overcooked chicken. They are slammed for not having an agenda, for having long, unwashed hair, for living in a decade that ended over 40 years ago, for having played too much Frisbee as kids. Much of that is true, but they have at least showed one thing that most Americans furious over the decade-long tidal wave of banking and political abuses have not—the courage to take to the street and stay there. They are the building block, that first step, of what may likely become a far more organized and status-quo jeopardizing legion. They are essentially saying that something is wrong, and while they might not know exactly how to fix it, their point is clear: We are not leaving until someone does something. As they continue largely ignored, the great question is whether more organized, politically and economically savvy groups will join their call. Certainly in a sense, the farmers and sophisticated futures traders have paid them a different bit of attention recently, as they have witnessed firsthand a heralded system that has failed them to the core.
The reason the banks always beat the people is that they are far more organized. It takes the people an exceptionally long time to go from complaining about things to actually doing something about it. The Greeks say “It’s terrible” to literally every injustice spoken, and what that means is, "Let’s just enjoy our coffee in peace." Slowly, I think the masses are unifying a touch, or at least there is a collective patience that is eroding away. In the MF Global case, what if every futures customer reduced their trading to just core ideas for a while? Yes, if traders, directly affected or not by MF Global, seriously narrowed the scope of their trading in an organized protest of the Exchange. I refrain from asking traders to completely abandon their strategies and drive for opportunities. It’s unrealistic even though the corruption has clearly weighed on widespread psyches and corresponding risk modeling. A crisis where the wrong precedents emerge and threaten all its actors. If trading volumes dropped by, say, 50% instead of the 10% that has occurred, what would the CME Group
(CME) do then? Likely, if players were this organized from the outset, some entity would have engineered a full backstop by now. Perhaps there is something to build on from this Occupy Movement. They have at least showed us a new will for justice.
CCC Protest of JPMorgan
JPMorgan has been eerily involved in some highly shady dealings regarding MF Global. As MF’s major custodian, fund flows ran through the untouchable bank. Customer monies were initially said to be found at JPMorgan, only to be refuted by the bank. Two-hundred million was then located in a UK arm of JPMorgan. Courtside, JPMorgan's lawyers have been trying every tricky maneuver possible to get ahead of pilfered customers on the bankruptcy chain -- another reason CME Group should have provided the necessary backstop to get the Interactive Brokers deal through. Their legal clout could have tackled JPMorgan’s deep-pocketed assault in a fairer battle. Thank God for James Koutoulos and the organized CCC, the Commodity Customer Coalition, which has risen like David against Goliath. Many of us who have endured this confidence-shaking ordeal suspect that JPMorgan, hedging its $1.2 billion unsecured credit exposure to MF Global, bears a great deal of responsibility in the difficulty regulators have had in locating such a large sum of stolen money. Then, there is the reported transaction where MF Global, after the parent company filed for bankruptcy, sold large quantities of Italian bonds to JPMorgan at 89 cents on the dollar, only to be flipped within a day to George Soros funds for 95 cents. The trustee was not informed, nor was there open bidding for the bonds in order to maximize the assets of the estate. Rumors swell that the reason this was permitted was that MF Securities, the broker-dealer unit, had not officially filed yet. However, its customers were shut down. Wires did not go out. Deliveries were not honored by the CME Group. Yes, the case against JPMorgan is growing tighter.
The CCC has called for all futures customers to contact their FCMs, starting with RJ O’Brien, where the majority of MF clients were transferred, to determine if they conduct any business with JPMorgan. If JPMorgan is a custodian, or in any way part of the money flow of the FCM, customers have been urged to switch to FCMs that do not conduct business with such a ruthless entity. I am in full support of this ban, and have sent a letter to my FCM today.
As a former customer of MF Global, I pledge -- if I ever get some capital back -- to be significantly more disciplined about my trades with the Comex. I will only trade "must do" scenarios. I will punt all marginal ideas, all spur-of-the-moment ones, all "shots." Silver margins are now less than 6x leverage, so the search for competing vehicles across the board is on. I’m sure plenty are being imagined in the wake of this crisis. I promise to find some balance between being true to my search for opportunity and being an active contributor in delivering the much-needed message the CME Group has struggled to hear. It cowered because it underestimated the resolve of its customers. On paper, CME took the cheap way out. I truly want CME to regret that decision. When you can’t penetrate its ears, you finally must go for its pocketbooks. Perhaps the Commodity Customer Coalition will join me in furthering its protest, and so will their friends. With a period of disciplined protest, futures traders can, somewhat ironically, put a more directed layer of brick upon the Occupy foundation. That’s the way real change begins.
I had written that I thought the metals would be in a sideways to down mode for a bit, indicating ultimate price targets of 1250-1350 gold and 18-24 silver. The action to this point is supportive of the thesis and has ultimately given me some time away from these financial markets. That, I assure you, has been divine, my best holiday present for sure. It’s tough to trade when all your liquid funds are locked up with a trustee as they remain today. In general, it seems a decent time to have the hands off the keyboard.
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