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:
- Hadden was just doing normal trading in an illiquid market that got away from him a bit, or
- Hadden was pounding up the December contract - and losing money on it - in order to manipulate other prices and make more money elsewhere.
The former is his lawyer's theory,3 and the wording of the order - "a standard form of risk management activity," "as a result of illiquidity in the market," etc. - makes it clear that the CBOT believes it. On the other hand it seems unlikely that the CBOT would have gone after him if that's all they had thought he'd done. "Disorderly" or no, it's unusual to get in regulatory trouble just for losing money on a trade. Here's DealBook in December:
[R]egulators at the CME Group, which runs commodity and futures exchanges, are investigating whether Mr. Hadden’s purchases or sales of Treasury futures late in the trading day manipulated closing prices in the market and, in turn, made other of his trades more profitable, according to people briefed on the matter who were not authorized to speak publicly.
Apparently not. Or, yes, whatever; one thing I've noticed before is that regulatory investigations don't always have a sophisticated grasp of the distinction between "legit hedging of one trade with another trade" and "evil manipulation of one trade by losing money on another trade." And, to be fair, that distinction can be slippery. Maybe Hadden did make money elsewhere on the move up here, but in a kosher way. Maybe he didn't. Maybe he did, and it wasn't kosher, and they let him off anyway. The CBOT isn't telling.
Instead they're just fining and suspending him for losing money on this trade, which is ... kind of weird? Like, I'm a little embarrassed for CBOT here: they investigated Hadden for nefariously manipulating other trades with his big Treasury futures trades, discovered that he in fact hadn't done that at all, and rather than saying "sorry about that, old boy, never mind," they instead punished him just for being messy or whatever. That seems very unsporting. On the other hand, I guess there are worse things than a regulator who says "hey, I noticed you lost some money trading big positions in illiquid markets. Maybe you should take some time off?" As a model of financial regulation that's pretty good.
1.He's suspended "from directly accessing all CME Group Inc. trading floors, and indirect and direct access to all electronic trading and clearing platforms owned or controlled by CME Group Inc."
2.Next week you can if you choose go to a reading of former trader Turney Duff's memoir of what I would characterize as a disorderly trading career. It involves really quite a lot of hookers but at least the excerpt in the Post did not focus on trading Treasury futures at expiration. I will hold out for Glenn Hadden's memoir.
3.As he puts it:
This matter arose from standard risk management procedures for Treasury note futures contracts. Although Mr. Hadden acted in good faith and attempted to follow a textbook approach, he had difficulty liquidating the futures position in an orderly manner in light of stressed and illiquid market conditions.