February 29, 2008 / 8:19 PM / 12 years ago

E-trade to thrive despite MF Global wheat loss

CHICAGO (Reuters) - A rogue trader who chalked up $141.5 million in losses for broker M.F. Global MF.N trading wheat futures made those unauthorized bets electronically, but the scandal is unlikely to dampen interest in screen-based trading which has grown exponentially the past two years.

The ability to get in and out of a market without leaving tracks for competitors, or the media, is helping to lure more and more speculative investors to electronic trading.

“It’s good in that it’s cheaper, quicker and it’s resulted in a dramatic growth in volume. It’s very efficient,” said Vic Lespinasse, analyst for Illinois Grain.

“The companies need better safeguards — it had nothing to do with electronic trading,” Lespinasse said, alluding to rogue trader Evan Dooley exceeding his trading limits to incur the losses for MF Global, the world’s largest broker of exchange-listed futures and options.

The growth of electronic trading at the Chicago Board of Trade, the world’s largest grain exchange, has been huge.

“Right now about 81 percent of our volume is done electronically, 41 percent higher than at the beginning of the year,” said Mary Haffenberg, spokeswoman for the CME Group CME.N, parent company of the Chicago Mercantile Exchange and


“For CBOT grains and oilseeds, we trade about 800,000 contracts a day, and of that, about 508,000 are traded electronically, or around 64 percent,” she said.

CBOT data showed that about 100,000 CBOT wheat contracts were traded on Thursday and 90 percent was done electronically. By comparison, 72 percent of the corn was done on screens and 76 percent of the soybeans was traded electronically.

“Voice broke retail (open-outcry) is the smallest part of our retail business and it is declining quite rapidly unsurprising as almost all new customers choose to trade online,” MF Global Chief Executive Kevin Davis said on Thursday during a press conference following the news his company had lost millions.


The news has sent MF Global’s share price plummeting about 50 percent and triggered a frenzied trade in stock options.

“MF Global is once again one of the stand-out option plays on Friday as investors continue to pound the stock after more details emerge over the unwind of some damaging wheat futures positions,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, in a note to clients.

“Having debuted in July 2007 as a public company at a share price of $30, shares today breached the $20 level before accelerating to a low of $14,” Wilkinson said.

On Wednesday, when Dooley executed his losing bet, Chicago wheat futures traded in a huge $2.69-per-bushel range, plunging by their $1.35 daily trading limit and then soaring nearly that much, leaving traders in the traditional open-outcry wheat puzzled.

Until this year and before electronic trading gained traction in the agricultural futures markets, a 10- or 20-cent per bushel swing in the wheat market would have been big news.

“Electronic trading does create an opportunity to get your information back in the market faster, but it also needs controls, it can cause increased volatility as we saw Wednesday,” said Jerry Gidel, analyst for North America Risk Management.

Bermuda-based MF Global said client funds were not affected by the loss, which stemmed from a failure in retail order entry systems, and CME Group said MF Global had met its obligations to CME Clearing and remains in good standing.

Although the company’s $141.5 million dollar loss pales in comparison with last month’s 4.9 billion euros ($7.26 billion) loss by French bank Societe General (SOGN.PA) because of a rogue trader, it was more than enough to generate fear and panic about the firm’s stock value.

“Investors are clearly concerned about how deep the risk problems run at MF Global, and this is exacerbated by the SocGen rogue trader actions one month ago,” said Jon Najarian, a founder of Web information site optionmonster.com.

Additional reporting by Doris Frankel, Christine Stebbins and Julie Ingwersen in Chicago, editing by Matthew Lewis

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