Umm so maybe someone wants to explain to me what happened to Glenn Hadden? He’s the head of rates at Morgan Stanley, formerly at Goldman, and he was just banned from all CME trading floors for ten days, which is a little funny because, like, what, was he going to walk around on an exchange floor? Like in a tour group? But actually he can’t use computers either,1 so basically, no Treasury futures for ten days. That starts in mid-July and, god, I’d like to be banned from a computer for ten days in July, but I guess the perks of being a successful rates trader include punishments like that.
Anyway the thing he did was … well here is the Notice of Disciplinary Action, which says that the thing he did was violate CBOT Rule 560, which requires that big “positions must be initiated and liquidated in an orderly manner.” So his offense was to trade in a disorderly way when he was at Goldman five years ago. Specifically:
December 19, 2008, during the final minute prior to expiration of the December 2008 10-Year Treasury futures contract, in order to cover the tail (a standard form of risk management activity associated with holding a Treasury futures position at expiry) for the position held by Goldman, Sachs & Co.’s Treasury Desk, Hadden, then a Treasury trader for Goldman Sachs & Co., executed a 100-lot market order, and then submitted a 50-lot limit order, which was only partially filled as a result of illiquidity in the market. During the course of these orders and subsequent fills, the market traded up 27+ ticks resulting in the final price of the December 2008 10-year Treasury futures contract settling above what was indicated by the December – March calendar spread.
So: he tried to buy a lot of Treasury futures real fast, and as a result of that he ended up paying too high a price for them. I guess that’s a little “disorderly” but also sort of underwhelming.2
What is going on? Obviously there are two possibilities: Read more »
The Dow Jones Industrial Average is a very stupid measure of the stock market for at least two reasons, which are (1) it is an average of only 30 big stocks and (2) it is weighted by share price, an entirely arbitrary number, rather than market cap or equal weighting or anything at all sensible. Was Mr. Dow an idiot? Probably not? He was just a guy inventing indices in 1896, when computers couldn’t fit in your pocket and were pulled by horses.1 Back then, to get a stock market average, some schmuck had to actually go look at a ticker tape for each stock price and then do the averaging on a … I’m gonna say an abacus? (Slide rule? HP 12C?) So “add up 30 stock prices and divide by 30″ seemed like a good plan; “take the float-adjusted market-cap-weighted average of 500 stock prices” did not. You can’t really fault Mr. Dow for the choices he made at the time he made them.
It is now 117 years later and nobody really uses the Dow anymore except, like, everybody, but people do use the S&P 500 index, which has the advantage that it’s a reasonable enough index of the thing it is an index of. But as with the Dow, a certain sense of “ooh the clerk is working so hard to calculate all these averages” still clings to the S&P, even though that’s obviously false. The clerk is a computer and it’s so bored calculating stock indices that it’s mining bitcoins on the side just to feel something.
I think that has something to do with this CBOE vs. International Securities Exchange dispute over S&P 500 (and DJIA!) index options. The CBOE lists such options; the ISE doesn’t but wants to. So the CME and McGraw-Hill, which together own the S&P 500 index, and the CBOE, which licenses it for options trading, sued in Illinois courts and got an injunction saying nobody else could use the index to list options. And today the CBOE finally totally won its case when the Supreme Court refused to hear it, leaving the Illinois court’s injunction in place, and thus leaving CBOE with a monopoly over derivatives on the S&P 500.2 Here’s CBOE’s gloating.
There’s no opinion from the Supreme Court and there’s a lot of goofball copyright preemption law involved; the Illinois court decided the case not on (federal) copyright law, but on … I dunno, this: Read more »
When two exchanges eye each other from across the ocean, there’s a pretty standard courting procedure. One or both have usually been spurned and lust after a deal, if not particularly with the available lepers, then after a deal for a deal’s sake, just to show they’ve still got it. They dance around each other for a while coquettishly, before agreeing that it really would be a great idea to spend their lives (or a convenient period of time) together.
Then, the regulatory chaperones step in and, usually, say no. Read more »
One thing that people like to say is that insider trading in commodities is just fine. It’s the point, even: the main people – if some politicians had their way, the only people – who trade in commodities are the people growing them, or digging them out of the ground, or whatever one does to make commodities on the one hand,1 and the people eating them or burning them or whatever one does with commodities on the other hand. All hedging real-world activity, no speculation. And if you’re a huge wheat grower, and all your wheat was involved in some sort of unexpected wheat accident, then you will probably want to go buy some wheat in the market (to close out your hedges or satisfy your contracted delivery requirements or bake your bread or whatever). And you’ll probably want to do that before prices go up when people realize that the supply of wheat is lower than expected. And you can do that. That’s fine. That’s hedging, more or less, not insider trading.
But that’s not the whole story. Trading in advance of your own inside information is okay, but trading in advance of someone else’s inside information is … sometimes problematic, depending on where you get that information from. For instance, operations people at commodities exchanges really shouldn’t be telling traders on those exchanges confidential information about other traders’ positions and trades. Like Billy Byrnes and Christopher Curtin allegedly did. It’s bad. Humongously bad even: Read more »
Efforts to create the first electronic “dictionary” defining derivatives and other financial instruments universally have moved ahead with the creation by US regulators of a committee to help develop it made up of BlackRock, the investment manager, CME Group, the derivatives exchange, and Google. Global Derivatives Lexicon Edges On [FT via HNM]
In early October of 2008, Ken Griffin and his partners-in-crime at the Chicago Mercantile Exchange had a dream. It was a dream of bringing “stability and transparency” to the credit-default swap market in such a way that would “reduce much of the systematic risk inherent” in those crazy derivatives.
That December, the CMDX clearinghouse/trading platform got the go ahead from the Commodity Futures Trading Commission. In March of this year, it received its final regulatory approvals.
And, if it’s lucky, for Hannukah, it may actually get to clear a trade or two.