Posted by Karl Denninger
Gee, honest mistake?
From: CME Globex Control Center
Sent: Wednesday, January 13, 2010 4:54 PM
Subject: ESH0 Event
Between 11:03 and 11:04 CT today, there were a series of transactions in ESH0 in which a market participant appears to have inadvertently traded approximately 200,000 contracts as both buyer and seller. CME maintains trade practice and risk management rules and procedures respecting such matters. In keeping with standard practices and CME’s self-regulatory responsibilities, CME is reviewing the circumstances of this event.
As both buyer and seller? Uh…. wait a second. On the same order?
This is the “action” being discussed:
That was roughly 94,000 contracts on a one-minute bar, as you can see, an absolutely massive amount of volume compared to that in the immediate vicinity.
Needless to say that spooked people. My initial thought when I saw it (and I did see the blocks go by on T&S – there were a lot of 1,000 and 2,000 contract orders that filled!) was that they were buy stops just above the overnight range set at about 7:00 AM Central. The “barker” in the pit also characterized it this way – understandable, since that’s exactly what it looked like. Of course the pit folks saw it, assumed it was a big buy stop and piled in.
But both the CME email and the volume bar implies that the same “market participant” was both the buyer AND THE SELLER.
Here’s the problem, in a nutshell:
There is no way you could come in with 200,000 contracts worth of bid without lifting the entire offer chain and spiking the market 20 handles or more north instantly. Yet that didn’t happen, which strongly implies that whoever entered the “buy” also, at the same time, entered a “sell” at the same strike and time, which the email from CME seems to confirm. The fact that the executions came literal milliseconds apart and were in even-lot blocks of 1,000 and 2,000 contracts further implies that this was some sort of manipulative game.
This entire little episode smells like dead fish. Someone was either “lying in wait” with enough liquidity to soak that up and not generate a price spike, whoever did it was on both sides (and thus GUARANTEED there would be no material price spike) or one of the oddest coincidences I’ve ever seen in the futures markets – 100,000 contracts magically appearing on both bid and offer from two different people at the same precise instant – magically occurred.
If the intent was to scare the bejeezus out of anyone who would “dare” to short a potentially-failed breakout, they succeeded. Who’s going to try to short into someone who has 100,000 contracts that will magically appear opposite your offer at the most-opportune time (for them) and bury you 6 feet under?
Of course this begs the obvious question: Who has the margin capacity to execute a trade like that ($5,625 per contract required for initial margin), or $562,500,000 – yes, $562.5 million) – on each side of the trade? (this assumes the volume I have here is right – if its really 200,000+ contracts, double that.)
I’ll bet my last nickel neither the CME or SEC will do a damn thing about this, despite the outrageously blatant character and the clear implication of the event. Nor will we see ANY update from the CME or SEC on what did actually happen or who was responsible.
You can take that to the bank.
Charles Biderman of Trimtabs (a very well-respected research outfit) has argued for a while now that the rally for the last several months cannot be explained by buying coming from any of the trackable sources. That is, it’s not coming from institutions, it’s not coming from households (individual investors), it’s not coming from pension funds or hedge funds. He therefore argues, as a matter of exhaustion (who’s left?) that it likely is coming directly from The Federal Reserve and/or Treasury via intervention in the equity markets.
Are we all trading in a rigged casino? I have not been a subscriber to these sorts of theories over the years, but when you see activity like I saw today in the futures market without a clear, cogent explanation of what actually happened that also fits the facts you have to wonder.