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PFGBest: Trust Liquidated

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This most recent fraud essentially means the investor can trust no one. No one.

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MINYANVILLE ORIGINAL That the Peregrine Financial Group (PGFBest) by all appearances misused customer funds and falsified bank statements is, for me, a watershed.

The MF Global (MFGLQ) debacle of October, though similar, didn't really shock me all that much. As a headline it read essentially, "Huge global institution ruins investors in selfish scheme to boost profits that went awry," and wasn't so surprising. But, for the friendly, trustworthy, Iowa-based niche futures clearing house to have done the same thing -- and for it to go undetected again some eight months after the last incident when regulators should have been hypervigilant -- is really, as my grandmother would say, "beyond the pale."

Given all the particulars of MF Global and yet the regulators didn't confirm that bank deposits matched the statements they were shown? Geez. "The whereabouts of the (PGFBest customer) funds is currently unknown," as the US Commodities Futures Trading Commission (CFTC) so delicately puts it in their formal complaint.

And regarding the watchdogs, the self-regulating National Futures Association and CFTC, they can say goodbye to any shred of hope that they'll exist in the forms they're in now. It's going to be one giant SEC octopus. As if Dodd-Frank, trading limitations, and everything else weren't making enough of an impact on liquidity, the watchdogs' apparent systemic failure to detect this fraud is going to result in the kind of uber regulations that will make trading commodity swaps, futures, and options even more costly and cumbersome than imaginable. Say bye-bye to liquidity and hello to extreme market moves when anyone does trade.

At least the Chicago Merchantile Exchange (CME) has a second chance to prove it learned its lesson. If it does not step up to the plate and make customers whole after failing to do so with the losses at MF Global, it can kiss farewell any goodwill still left. In the MF Global case, the best it did was lobby for changes in the SIPC protection (specifically designed for equities, not commodities) and we've seen how well that has played out. The Intercontinental Exchange (ICE) should feel free to jump in here in at any point to differentiate themselves.

I'm not alone in my despair over PFGBest. Everyone I know in commodities is in shock. In their newsletter to clients Attain Capital summed up what many others are feeling: "MF Global had us angry, but this time, it's personal. Our clients have money with PFGBest. We have money with PFGBest. We were misled by [executives] that we trusted."

In the equities market an investor has always known the system was gamed to some extent as brilliantly outlined in Scott Patterson's book Dark Pools. Whether it was the exchanges protecting the specialists and market makers of old or the new elites weilding high-speed artificial intelligence-enhanced trading, it pretty much didn't matter.

In commodities, however, it used to be that if you hedged a physical position or offset other trades, you got your money's worth -- protection from market moves for a small insurance cost. Speculators speculated, and if they bet wrong so be it; they were providing liquidity and they knew the risks. Meanwhile, both sides, the hedger and the speculator had to have large funds on deposit -- and make margin calls when asked.

Trading through a broker is not supposed to be the equivalent of a naked short. Insurance for investment fraud does not exist in the US and so players in risk-based markets can only conclude that brokers are part of that risk. Coming so soon after MF Global, PGFBest has all but liquidated my trust.

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