I doubt too many people sit around feeling bad for commodity traders, but take a moment if you will to consider what a small independent trader is experiencing as a result of this whole situation. First, for those unaware, here are the basics of the MF Global situation.
Last week they reported dismal earnings, which started to raise questions about the bets they had on. It turns out that MF made big bets gone bad in Europe, so much so that it caused them to file for Chapter 11 bankruptcy. MF Global's CEO is Jon Corzine, former head of Goldman Sachs, as well as, more recently, former governor of New Jersey. Following the bankruptcy filing, the CME group (the exchange) said that it no longer recognized MF Global as a guarantor for traders on the floor who used them as their clearing firm. Clearing firms extend leverage to their customers, and are responsible for monitoring the risk within customer accounts to ensure that customers have enough margin (cash collateral effectively) to satisfy the risk in their accounts.
Set aside the notion that every trader drives an expensive sports car and has a vacation home in the Hamptons. Many traders on the floor come to work every day trying to grind out a living; a highly stressful one at that. Those who clear with MF global are sitting somewhere, watching their position move, with no ability to take off risk. Their accounts are frozen. When dealing with commodities and options on those commodities, moves can be swift and unforgiving. A trader's career can literally be made and broken in a day. In volatile markets like these, it is hard to feel anything but sympathy for the traders unable to manage their own risk at a time like this. Moving a position/ receiving approval at a clearing
Currently, the MF Global books are missing something like 700 million dollars. MF Global (literally as I write) has admitted to using client money to help fund the trades that they were doing principally (using company money to put on trades). These funds are of course supposed to be segregated, and commingling client money to fund principle trades is among the most egregious crimes that such a company could commit. Bear in mind that whatever the "missing money" number is cannot account for the un-quantifiable amounts lost because traders could not hedge gamma/ take off risk while their accounts were frozen.
As if this is not enough, what are the greater implications of this MF'in situation? I just woke up from trying to read through a document on the implementation of the Volcker Rule. Apparently, on October 11th, The Fed and FDIC approved it. We are entering a world of law implementation that I am quite unfamiliar with at this point (I didn't know the Fed would have to approve anything as an independent agency). Anyone who can comment, please do. But to make the simple point, the Volcker rule restricts the ability of commercial banks to trade their own books. MF was not a commercial bank, so it would not have applied to them. But let's not be so caught up in technicalities as to dismiss the ammo the MF situation has given to Volcker Rule proponents. While I know the shedding of prop desks began years ago and hence there is a discount already built in, be wary that talk of curtailing a bank's ability to take on proprietary risk can only be bad for their stock prices.
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