Not really surprising this happened. Its not like FCMs see trade case inflow/outflows in real time. The system is still relatively low tech. These things are settled the next day. If the online accounting only showed 1/10 the loss it should have, it would've appeared that the account still had positive funds. It wouldn't be until later that the broker would discover the glitch reviewing customer's CME trades, which they are liable for. Perhaps the CME should implement real time mark to market accounting for FCM's.
Prearranged trades are against exchange rules. At least i know for sure it is on Eurex, and its reasonable to assume the same is the case for CME and other exchanges - for obvious reasons. So these trades may very well be canceled by the exchange anyways. Also, i'm not a lawyer, but this thing sounds a lot like wire fraud.
"Open E Cry, a broker registered on the Merc as OEC, claims that in early June, Yunusov discovered the glitch in the third-party online accounting software it used. Because of the software error, losses in Russian ruble futures, a lightly traded commodity, were reflected at 1/10th their actual value, Open E Cry says. Upon discovering the software error, Yunusov and an unnamed accomplice made more than 19,000 trades in a single day - June 4 - booking the losses on Yunusov's account, while hiding his gains in his confederate's account, according to the complaint." http://www.openecry.com/software/softwarehighlights.cfm So what version # ???
Thank you, I appreciate the info. "Peregrine in the UK" presumably wasn't a CFTC situation. Could you offer some color on "Spike Trading in the US" -- I'd be eager to learn more. I didn't see anything relevant on a quick Google. What was the magnitude of innocent-bystander customer losses, and when did it happen?
The Peregrine episode involved a few US traders, who were made whole, but the UK traders took a bath. Spike was a CME local clearer, and all were made whole after a year or two. It was in the mid to late 90s. I don't recall the full name of the clearing firm (Spike). Maybe someone can chime in on that.
I really don't see how this can be construed as fraud. All transactions were through registered brokers and through a regulated exchange. CME earns transaction fees and is responsible to insure counter party risk. Whether the guy purposely blew out his account exploiting a software bug is irrelevant. Any other interested party could have taken on any of these trades as the exchange itself advertises transparency. 19000 contracts generated at least $100K in transaction fees between these two brokerage accounts and the exchange. It is the responsibility of the broker and the exchange to contain and manage risk. They have recourse to sue the account owner if he has any assets. More than likely the account is setup as a separate legal entity so their recourse would be limited to the assets of the account holder.
Perhaps you're confusing Griffin for Spike? Griffin was a century old CBOT firm taken down by a London trader who used his own great scam-he executed trades through a "third party", via a "give-up" agreement. It took Chicago customers of Griffin a few weeks to receive their funds.
You're a bit off base. The trades were "pre-arranged" which in itself is illegal. Secondly, while an LLC or an "enity" MAY shield the general partner from ordinary liability, the structure does not give the GP protection, as an individual, from losses committed by recklessness or fraud. For example, Madoff was an LLC. He couldn't hardly defend himself by saying, "sue the LLC, I'm not personally responsible." And how is the CME supposed to monitor this activity? I presume these were "day trades" and that no circumvention of CME margins were involved.
Based on this same logic any trading manager account or sub accounts could also be construed as pre-arranged trades. ie.. long / short account controlled by the same CTA. In fact they even have the ability to post allocate trades. Now if he had bought and sold off the exchange under a private agreement I would agree. These transactions flowed through an open and transparent regulated exchange. CME/OEC have market surveillance and should have intervened instantly. OEC and CME were negligent.. you don't get relief from any court for stupidity. 19000 contracts is not the problem either: 60A01.E. Position Limits No person shall own or control a combination of Russian ruble options and underlying futures contracts that exceeds 10,000 futures-equivalent contracts net on the same side of the market in all contract months combined. In addition, no person shall own or control a combination of options and underlying futures contracts that exceeds 2000 futures-equivalent contracts in the lead month on or after the day one week prior to the underlying futures termination of trading day. For the purpose of this rule, the futures equivalent of an option contract is 1 times the previous business day's IOM risk factor for the option series. Also for purposes of this rule, a long call option, a short put option and a long underlying futures contract are on the same side of the market; similarly, a short call option, a long put option and a short underlying futures contract are on the same side of the market. 260A01.F. Accumulation of Positions For the purposes of this rule, the positions of all accounts directly or indirectly owned or controlled by a person or persons, and the positions of all accounts of a person or persons acting pursuant to an expressed or implied agreement or understanding, and the positions of all accounts in which a person or persons have a proprietary or beneficial interest, shall be accumulated.