How client "A" manipulated coffee futures...

Consider the following extract from a “final notice“, issued by the FSA on Wednesday as the UK regulator slapped a lifetime ban and a £100,000 fine on one Andrew Kerr, a commodity broker at Sucden Financial:

4.24. The 600 lot order was placed by Client A with Mr Kerr during a call that commenced at 12:06 and terminated seconds after 12:30. During the course of this conversation:

4.24.1. Client A indicated to Mr Kerr that he wished to buy a large amount of coffee futures shortly before 12:30: “on the close, just before the close, lift everything”;

4.24.2. Client A discussed with Mr Kerr how, by doing so, he hoped that the holders of the coffee put options would cover their positions (by buying coffee futures) and that he could then sell coffee futures as the price rose, before then exercising his own coffee put options;

4.24.3. Client A stated that the timing of the trade was important: “…we cannot afford to have any F-ups on the timing today ok”;

4.24.4. Client A asked Mr Kerr how many coffee futures he would need to buy in order to position the price above $1,750 at 12:30: “if I want to get this thing to finish through 50 [$1750], how many lots do I need to buy?”;

4.24.5. Mr Kerr advised that he would need to buy 330 coffee futures in the next four minutes to achieve this;

4.24.6. Client A then instructed Mr Kerr to buy 600 coffee futures up to a price of $1,757 at or shortly before 12:30, making it clear that his intention was to increase the price: “Ok I want you to on the close, this is the idea, that it finishes obviously higher than 1750. I want you to buy 600 lots of September up to 1757”;

4.24.7. Mr Kerr called a speaking clock so that both he and Client A could listen to the clock count down to 12:30;..

We think the regulator wants us to be shocked and disgusted by this, but as Reuters’ prime commods-watcher John Kemp pointed out in a column on Wednesday, this sort of manipulative behaviour is par for the course:

While Kerr’s behaviour was unusually blatant, and unfortunately for him captured on tape in unguarded language, using large volume trades to support or batter market prices close to daily or option settlements is common practice across commodity markets.

But who is this “Client A” and why is he not being hanged here, rather than the hapless broker? According to the dialogue above, it is the client that appears to be the real market gangsta here, not Mr Kerr.

We can only assume that action against Client A is still underway (and/or being resisted by the alleged manipulator). Mr Kerr chose to take the rap in exchange for a reduced fine under the FSA’s accelerated disciplinary scheme.

A further question: does making all this detail on the case public prejudice Client A?

Probably, but who cares? The FSA’s got its own institutional skin to save and every scrap of evidence that it’s cracking down on perceived market abuse helps that cause.

Sod the collateral damage.

http://ftalphaville.ft.com/blog/2010/06/02/249881/the-exposed-case-of-client-a/

 

What's the problem here?

The client wanted to try to squeeze the market and force some weak hands to cover.

Nothing wrong with that. Sometimes the client will will, sometimes the weak hands won't be as weak as he thinks and so he'll lose.

What next, are the regulators going to go after some locals for trying to run the stops?

 

When you describe things using this type of emotionally charged terminology, it becomes easy for the uninformed to think something nefarious is going on. Trying to "squeeze" the market or gun stops is not without risk, just like any other position.

 

Financial regulation is ambiguously written and arbitrarily enforced. The FSA could probably fit this in with some regulatory article that vaguely states what it means to manipulate a market.

Bottom line is: don't communicate your intention. There is no rational or dependable way to determine if a particular action is legal but if no intention was communicated to the broker then there would be no case.

 

what would be good is if they cracked down on this in the UK making regulation arbitrage far more profitable...

 

please explain what you mean by regulatory arbitrage.

 

I will only comment that some/all of you are TOTALLY CLUELESS!!!!! Go get a real job growing coffee! I don't care if you buy a place in Columbian or Ethiopia or Indonesia...then set up shop as a coffee grower who wants to sell his hard earned product...only then to be manipulated by some FU(K - once you have grown the stuff. If you already grow coffee - I am sorry for this response! If you are here as a "pure speculator" - fine! If you are here as a speculator with the intention of market manipulation - go FU(K yourself!

-gastropod

Caveat emptor - I am moving to Hawaii and would like to grow coffee on some of my acres!

 

ha this article is funny, Coffee is in and of itself a manipulated market, I don't even bother with that garbage anymore. No news here, move along.

 

In between the brackets shown below are a listing of all the markets that are NOT manipulated.

[]


(C) 2010 All Rights Reserved, No duplication without express permission.

 

My coffee always gets manipulated. It started when Starbucks set everyone to 20 hrs a week or less... I've never had the right tasting coffee since.