Evan Dooley, a broker in the company's Memphis office, put on a directional trade on his own account of 10,000-15,000 Chicago Board of Trade wheat futures contracts in the early hours of February 27, Davis explained. Internal terminals such as Dooley's did not have risk controls, as these slowed down processing when the broker was taking several voice orders. This allowed Dooley to put on the massive trade. The company has now added the controls to all internal terminals, which it believes should prevent a recurrence.
"Some individuals have personal accounts... but in general it's not encouraged, and they can never trade products that they broker for clients," Davis said. "But this guy didn't have any customers - he had one historical customer who hadn't traded in some time."
The position was liquidated within hours of the markets reopening at 9am on February 27, and Dooley has been fired.
Davis pointed out that Dooley had only been able to put on the unauthorised trade because of the dramatic growth in the wheat futures market in recent weeks. "Wheat has become much more liquid in the last 14 days, which is why he could put on positions large enough to lose so much money at one time. We are seeing moves in a day that we would have expected to see in a month," he said. On Wednesday, wheat prices moved 23% on the CBOT, trading between $10.90 and $13.45 a bushel.
See also: Rogue trade loses MF Global $141.5 million
Merrill Lynch misplaces $43 billion in derivatives cashflow
Kerviel acted alone, SG report finds
Mispricings at Credit Suisse cause $2.85 billion loss
The week on Risk.net, August 19-25, 2016Receive this by email