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There is an old saying that if you are going to steal $1,000 you may as well steal $1mil,
that the penalty is the same. As we go into the new year, neither the trading floor nor its customers have forgotten what Jon Corzine of MF Global and Russ Wasendorf of PFG did.  

When we showed up to the CME Group trading floor that day in October 2011 we knew something was wrong. Hundreds of traders were locked out from entering the trading floor and exchange security guards were all over the place. It didn't take long to learn what had happened. MF Global had gone out of business, and with it thousands of customers had lost their money. In my 35 years on the floor I had seen a lot of stuff -- the ’87 crash, the 1999-2000 tech bubble, 9-11, Gulf War I and II, the 2007 credit crisis, the 2010 flash crash -- but none of those could match the instantaneous damage the MF Global collapse did to the public, the CME Group and the trading floor as a whole.

The trading floor was already in trouble in the aftermath of the 2007 credit crisis. After several years of posting record volume in almost every CME futures and options products, there was a sense that volume on the floor was already going  lower; adding to the problem was year end. After the demise of Bear Stearns and Lehman Brothers from losses on holdings of European sovereign debt, most trading shops were told to back away from such trading, but Corzine called his troops together (prop traders) to give them the go-ahead. I personally knew a trader that was at Goldman and then B of A that told me his group would be trading soon after Corzine arrived at the firm. Corzine had gone from one loss to another. He took the MF Global job after losing to Chris Christie in the New Jersey governor's race in 2010. MF was much smaller than the big Wall Street firms he was used to dealing with, but he promised to  turn it into a  Wall Street firm by employing strategies used by his former firm, Goldman, making big bets with the firm’s money. I cannot describe the panicked look on people’s faces that day. Dowd Wescott, the largest firm between the CME and the CBOT, had over 1,000 traders denied access to the floor and many of the heads of the CME Group cleared there. Even Charlie Carey, the longtime director of the CBOT, was denied access to the floor. When Corzine was finally brought in to testify about the collapse of MF Global before the House Agricultural Committee on Dec. 8, 2011, Corzine said :

"I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules. Moreover, there were an extraordinary number of transactions during MF Global's last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global."

It’s hard to imagine all the pain and suffering caused by Corzine. All the job loss, all the customer funds that were never returned and the blemish to the exchange and the business as a whole. It’s even harder to understand why he didn't go to jail for his actions.

Next on the chopping block:

The next damage came from a small company called PFG. This story goes all the way back to Jack Sandner, the former head of the CME Group. PFG started out on a small office down the hall from RB&H. For years the “little” company was run by Russ Wasendorf. The CME was already reeling from the effects of MF Global but the revelation that another futures clearing merchant (FCM) was being accused of fraud sent shock waves throughout the industry and the world. PFG offered to help people learn to trade through education and research. After being an introducing broker (IB) since 1972, the firm stepped up to the big time and became an FCM in 1992. In 2011 PFG was honored with the Iowa Character award by Character Counts, an Iowa nonprofit. On the web site it said:

"The achievement honors individuals, schools and organizations that consistently demonstrate and promote the six pillars of character: trustworthiness, respect, responsibility, fairness, caring and citizenship."

It may be hard to read if you were a customer who lost their money or an employee who believed in what PFG stood for, but the firm’s owner behaved in a manner that ran counter to everything the industry stands for. As margin calls piled up, instead of being a man and standing up and admitting his illegal acts, Wasendorf unsuccessfully tried to commit suicide. Then and only then did did he admit to making up fake bank statements and stealing over $210 million of customer segregated funds. Years and years of training his people to talk bad about other firms like Alaron Trading and Vision Financial had come to a terrible end. Russ Wasendorf Sr. used customer segregated funds to become a well-known philanthropist and is now sitting in jail awaiting his trial.

There have been a lot of bad actors in our business over the last several years: Kweku Adoboli, Raj Rajaratnam, Nick Leeson, Jerome Kerviel, Bernie Madoff and many, many others. The letdowns have not only shaken the industry, they have caused increased scrutiny from the government, but as of today only a few have actually gone to jail. Maybe that’s about to change. It needs to change!

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view: The 4th quarter earnings start today with Alcoa. If the S&P is going higher from here it needs to back and fill a bit. Our call is again to sell the early rally and look to buy weakness. As always, keep an eye on the 10-handle rule and please use stops.

  • It’s 7:15 a.m. and the ESH is trading 1453.75, down 2 handles; crude is up 28 cents at 93.47; and the euro is down 24 pips at 1.3096.
  • In Asia, 8 out of 10 markets quoted closed lower (Shanghai Comp. -0.41%, Hang Seng -0.94%).
  • In Europe, 10 out of 12 market are trading higher (CAC +0.54%, DAX +0.06%).
  • Today’s headline: “Alcoa on Tap, S&P Futures Seen Lower”
  • Economic calendar: Today:  NFIB small business optimism index, 3-yr note auction, consumer credit, International Consumer Electronics Show and earnings from Alcoa. WEDNESDAY: Weekly mortgage applications, oil inventories, 10-yr note auction and earnings from Constellation Brands, PriceSmart. THURSDAY: Jobless claims, wholesale trade, natural gas inventories, Fed's George speaks, 30-yr bond auction, Fed's Bullard speaks, Fed's balance sheet, money supply, Fed's Kocherlakota speaks. FRIDAY: International trade, import and export prices, Fed's Plosser speaks, Treasury budget, Best Buy to report holiday sales and earnings from Wells Fargo
  • Total volume: 1.18mil ESH and 12k SPH traded
  • Fair value: S&P -2, NASDAQ -3.25
  • MrTopStep Closing Print video: Link


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