February 29, 2008 in Business

Rogue broker blamed for wheat trades

Laura Mandaro and Kate Gibson MarketWatch
 

SAN FRANCISCO – Wheat is the latest market to be shaken by news of a trigger-happy trader, casting unwanted attention on yet another of the world’s commodities caught in the rush of money seeking quick gains outside flailing stock markets.

Futures and options broker MF Global said Thursday that it would take a $141.5 million bad debt provision after one of its Memphis brokers, identified as Evan Dooley, vastly exceeded his authorized trading limit Wednesday morning. He was trading wheat futures in Chicago. Shares in MF Global dropped as much as 23 percent.

Commodities traders said actions by the brokerage to cover Dooley’s large short position appeared to cause a violent jump in wheat prices in Chicago Wednesday. The May futures contract traded on the CME Group commodities exchange rallied more than $2 to $13.39 a bushel that morning. On Thursday, May futures settled at $11.65 a bushel.

“It’s a high-stakes game and it’s certainly evidence of the heightened risk and volatility we’ve been seeing,” said Austin Damiani, a floor broker in Minneapolis with Frontier Futures, Inc. Damiani said Minneapolis trade reacted to the Chicago activity Wednesday.

The brokerage’s loss follows a volatile week for wheat prices, which hit all-time high of $25 a bushel on the Minneapolis Grain Exchange on Monday and are trading over four times their levels of two years ago. In Chicago, the front month futures have more than doubled in the past year.

“These kinds of events tend to occur at market tops rather than market bottoms,” said Dan Basse, president of Chicago-based research and consultancy AgResource Co.

“You get other players, extreme emotions and rising margin requirements. It’s mixing in the worst of people’s emotions and money,” he said.

MF Global said Dooley was not trading for the firm’s trading account but for his own, personal account. The company’s internal controls failed to prevent the trades. When the company did identify the position, which it said amounted to a “few thousand lots” of wheat futures traded on the Chicago Board of Trade, it went into the market and liquidated them all Wednesday morning, executives said in a conference call.

The run-up in wheat prices can be traced to tight global supplies. A series of bad weather events in grain-growing regions around the world, including a drought in Australia last year and heavy rainfall in the United States and Europe, as well as more acres being devoted to corn for ethanol, have all severely limited output. AgResource’s Basse said global wheat production last year fell 30 million metric tons short of the 630 million tons his firm had forecast.


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