It’s a poorly kept secret that honesty is the rarest commodity in financial circles. Greed, insider dealings, questionable ethics and all manner of corporate malfeasance are rampant on Wall Street.
That’s why the Obama administration instituted crippling Dodd-Frank regulations a decade ago.
That said, it’s easy to assume that only big and powerful Wall Street bankers like Wells Fargo, BofA and JPMorgan Chase are able to manipulate the markets to any appreciable degree. Yet, history is littered with cases where everything came together at just the right time and order thus allowing a single trader or small group of traders to rock the markets.
You really don’t have to look very far to find the evidence.
Profitable Mystery of Trump Oil Trades
Nobody here is accusing the POTUS of market manipulation, but stock markets move when president Trump tweets prolifically.
It’s not Trump’s usual Twitter activity that’s been roiling the markets this time around; rather, some mysterious wagers in the stock markets--some revolving around Trump’s events--have been leaving traders in shock and awe due to their precision and timing.
Take the case of a trader or group of ‘prescient’ traders who appear to have had foreknowledge of the Saudi Aramco drone attacks and made huge profits by correctly anticipating the stock market rout.
The said trader or traders sold short 120,000 S&P e-minis--basically futures contracts linked to the S&P 500 index--on Friday, September 13, just before the close of business at the Chicago Mercantile Exchange or CME.
A few hours later, drones attacked large swathes of Saudi Arabia’s oil infrastructure, crippling production and sending oil prices soaring. When the CME opened again on Sunday night for pre-trading, the S&P 500 tanked 30 points thus helping the trader or traders to book a handsome $180 million in profits in a matter of days.
Here’s how the math works: A single one-point up or down by the S&P 500 is worth $50 in an e-mini contract. A 30-point movement is, therefore, worth $1,500 per contract. The lucky trader or traders who bought the 120,000 e-minis were, therefore, able to realize a return of $180 million.
The Aramco trade was not an isolated case.
On September 11, the Beijing government announced it would lift tariffs on a range of American-made products. On the same day, President Trump returned the favor by announcing he would postpone tariffs on some Chinese goods. As expected, the markets reacted positively to the news with the S&P 500 jumping 47 points.
Coincidentally, someone had bought 82,000 e-mini contracts the previous day, just before the close of business. The lucky trader was left sitting on a cool $190 million for a single day’s work.
Still, these two trades pale in comparison to the trader or traders who purchased a huge amount of September e-minis just before another major market-moving event took place.
On June 28, a trader bought 420,000 September e-minis representing 40 percent of the day’s trading volume in that month’s e-minis. A day later, the president announced the intermittent trade negotiations were “back on track.” The S&P 500 gained 84 points over the following week, leaving the trader of group of traders with a very fat $1.8 billion in profits.
One longtime CME trader who has told Vanity Fair that he’s never seen anything quite like it since September 11, 2001 when Al Qaeda cashed in before launching attacks:
“There is definite hanky-panky going on, to the world’s financial markets’ detriment.This is abysmal.”
Norwegian Energy Trader Creates $133M Hole in Clearing Fund
Whereas it’s not possible for us to establish the identity of the e-mini traders who seem to be manipulating the market, there have been well-documented cases of foolhardy traders who lost their shirts after pushing the envelope too far out of sheer greed.
One is Einar Aas, formerly one of Norway’s wealthiest men.
Last year, Aas lost everything after engaging in some over-ambitious energy plays.
Aas had opened positions in the Nasdaq Stock Exchange that were too huge in relation to the liquidity of the market. On September 10, there were extraordinary price changes in the German and Nordic power markets that wiped out Aas’ capital and put a $133 million hole, or 68 percent of its capital, in Nasdaq’s contingency fund that’s used for derivative trading in the European energy market.
Nasdaq banned Aas from the exchange, covered $8.2 million of the losses itself and ordered members of the commodity clearing operation to pay the balance or risk being declared in default.
Aas was able to cut a deal with his creditors thus narrowly avoiding bankruptcy.
Steve Perkins’ $500M Drinking Binge
If the most damage you have done while drunk was to ruin a party, wake up in a ditch three states away or maybe get arrested for DUI, then go easy on yourself; you’ve got nothing on Steve Perkins.
Back in 1992, oil trader Steve Perkins went on a golfing retreat over the weekend, fully funded by his employer PVM Oil Futures. Come Monday morning, Perkins decided to extend the bender and continued hitting the bottle till the wee hours of Tuesday morning, before starting to trade in his badly inebriated state.
Although oil brokers are only supposed to make trades on behalf of their clients, Perkins decided to do it for himself using the company’s money. He purchased 7.13 million barrels of Brent over a 19-hour period--representing 69 percent of Brent volume traded on the day--at a cost of $520 million.
Consequently, oil prices shot up from $71.40 a barrel to $73. His befuddled trades lumbered PVM Oil Futures with losses of $9.7 million though, incredibly, Perkins claims not to remember anything about that fateful night.
He got off rather lightly, too-- a 72,000-pound fine and a 5-year ban from participating in any regulated market activity.
Other notable cases are:
- David Li invented the Gaussian Copula cheat code that would presumably remove the risk from investing. Li’s breakthrough led to a flurry of silly bets by overly-confident money managers. Credit default swaps soared from $920 billion before his formula hit the markets to a staggering $62 trillion at the height of the madness. Predictably, it all came crashing down and ushered in one of the worst recessions in living memory.
- George Soros broke the bank of England by betting against the British Pound. In 1992, Soros sold $10 billion worth of the sterling pound short, flooding the currency market faster than the British government could lap it up. The pound crashed 24 percent.
By Alex Kimani for Oilprice.com
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