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Analysts Have a Few Problems With Trump ‘Chaos Trades’ Article

Sarah Ponczek and Nick Baker

(Bloomberg) -- While the idea Donald Trump’s White House might have leaked market-moving news isn’t crazy, a new magazine story suggesting traders made billions of dollars front-running geopolitical events failed to pass the smell test among Wall Street professionals.

Analysts and investors who spoke to Bloomberg News were mostly skeptical of a Vanity Fair article titled “The Fantastically Profitable Mystery of the Trump Chaos Trades” that raises the possibility traders did more than get lucky buying S&P 500 futures right before big market swings. While nothing is impossible, experts who examined the story said any implication that people traded on inside information fell short of being proven.

“I don’t see where the dots are connected,” said Michael O’Rourke, JonesTrading’s chief market strategist. “Unless you have the trading records, which you don’t, you can’t tie one and one together to make two the way this story is laid out.”

The story’s author, William D. Cohan, said “of course I’m standing by my reports,” which reflected the accounts of sources in Chicago trading pits. The one-time Bloomberg Opinion columnist said he was alerted to trading patterns that caught the attention of professionals with decades of experience, and that alternate explanations could exist.

“I don’t make any allegations, I don’t know what really happened. I was just being reportorial about what traders in the pit were seeing,” he said. “Do I trust my sources? Absolutely. Are they vastly experienced? Absolutely. Does everybody see things differently? Probably. What I’m saying is ‘Hey, there are regulators whose job it is to see these things and investigate them.’”

The article describes five big trades in S&P 500 e-mini futures from June 28 to Sept. 13, ranging from 55,000 to 420,000 contracts. It said each position was taken shortly before market-moving news -- three times involving the U.S.-China trade war, once the bombing of Saudi oil fields and once Hong Kong politics. Thanks to market reactions, the magazine said, people involved in the transactions could’ve booked gains of $82.5 million on the smallest to $1.8 billion on the biggest.

But attributing sinister intent to a handful of trades that quickly became money-makers ignores how common such large trades are in the futures market, said industry pros. Given how often people move tens of thousands of futures contracts at once -- and how often people like President Donald Trump send stocks reeling -- someone looking for suspicious timing is guaranteed to find it.

“Typically these stories focus on the times you’re right. No one writes about people buying a couple hundred million of e-minis and the market doesn’t do anything,” said Max Gokhman, the head of asset allocation for Pacific Life Fund Advisors. “Volume spikes happen all the time.”

Anita Liskey, a spokeswoman for CME Group Inc., the exchange where S&P 500 futures trade, declined to comment. The Vanity Fair article cited a spokeswoman for the CME saying the trades in question didn’t originate from a single source and they were of no concern.

One trading expert, the chief executive officer of a major quantitative shop who asked not to be identified, said an analysis by his firm suggests no giant trades like the ones the article described appear to have happened. The story says that in the last 10 minutes of trading on Aug. 23, someone bought 386,000 of the September S&P 500 contracts. That number is close to the total volume for September e-minis from 3:50 p.m. to 4 p.m. New York time, spread over thousands of trades -- unlikely to be the work of a single person.

Moreover, CME rules prohibit anyone from owning more than 60,000 e-minis at a time. And such a trade would’ve been gargantuan: worth nearly $60 billion. That’s big enough to send the stock market sharply higher and probably trigger trading halts, according to the CEO. That didn’t happen.

The Vanity Fair story described Chicago pit traders concerned that people got inside information on “Trump or Beijing’s latest thinking” before taking the positions. Others saw coincidence. In a world where the president sends markets up and down multiple times a day, they said, it’s possible to depict virtually all trading as a reaction to something he does.

“Every time stocks move after some crazy Donald Trump news -- which, again, is every time stocks move -- half the people who traded futures ahead of the move will look smart (and the other half will look dumb), and you can, if you want, build a conspiracy theory out of that,” Bloomberg Opinion columnist Matt Levine wrote Thursday.

Prompted by the Vanity Fair article, Democratic Representatives Ted Lieu and Kathleen Rice called for a federal investigation into the timing around sales of e-mini futures contracts before significant geopolitical events or statements from Trump.

“Millions of futures contracts trade a day, billions of dollars trade a day, so to make a connection, I feel like it’s very hard to do,” said JonesTrading’s O’Rourke. “To me the article just speaks more about the national sentiment about the office of the president.”

(Adds U.S. House members calling for an investigation. An earlier version of this story was corrected to remove erroneous volume data.)

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Nick Baker in Chicago at nbaker7@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net;Jeremy Herron at jherron8@bloomberg.net

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