4:00 PM 11-4 Update: J.P. Morgan & MF Global Fight over funds.

I’ve thought long and hard about whether, when, and how to write a post on the MF Global situation.

One reason was because I wanted to avoid participating in the initial industry rumor mill which has been rampant beyond belief over the last four days – and which often contains more inaccurate vs. accurate info.

Another reason is that I have a lot of “skin” in this particular dilemma – actually more of full torso as I mention below – and didn’t want my personal emotion to dictate my words.

Yet this journal – even as it’s evolved into more of a formal educational venue in recent times - has always been about the “good, bad, and ugly” of the truth behind the futures trading industry.   And oh, have all three been seen in spades this week.

As a quick aside, I’m told I remain one of few – if any – to have publicly spoken about my personal drawdowns and rocky periods along the road to present day, including that large one-day draw on that Monday in October 2008 when the VIX was spiking toward 80 and last year’s Flash Crash - both of which occurred among backdrops that had never been seen in the industry.  Of course, both were simply momentary stumbles from which I recovered as any decent trader would and should, including using that Monday lesson to turn a profit by week’s end.

And so I feel the time has come to speak in the continuing spirit.

So here we go again with a deeply personal post with full transparency.

I’ll begin by saying that I am one of the larger non-institutional clients for whom MF Global cleared futures trades, with approximately $3 Million in personal trading balances amidst three accounts.  One is my main retirement account, one is a small personal account, and the other is the modest prop firm account I’d recently established.

I’d been a customer of theirs since 2003, and I’d rank their trade clearing, technical support, reporting, and yes – even the ethics of those with whom I directly worked (note the bold) - second to none.

I’ll also quickly follow up these points with saying that I made two personal mistakes that led to more personal angst this week than should have ever occurred.

The first was leaving too large an accumulated balance directly with the clearing firm.  Ironically, I truly thought about significantly reducing the balance in recent days, but hadn’t moved on it given what I viewed as “higher priorities” … not to mention the fundamental essence of “segregated accounts” with daily controls.  Even Refco clients ultimately retained 100% of their capital amidst an environment of complete fraud.

I’d also not given MF’s Europe debt problems enough personal attention and thought during the preceding week as my focus was on my other businesses much of the time, including my obligation and fiduciary role to PivotPoint Advisors, for whom we had just closed out of Friday’s profitable long trade sequence at the market highs before this week’s early-week cliff drop. And again, there was that “segregated account” protection where business segment A was supposed to have no relation to business segment B.

The second error at my end was not having a back-up clearing firm with whom I could immediately clear new trades, which cost me dearly in opportunity loss this week … which in the “when it rains it pours” category turned out to be the most fertile trading environment in terms of concrete opening MATD or gap sequences we’ve had all year.

So before I jump on the MF dogpile, that’s my own glass house for all to see.

Now, let’s turn to the chronicle of my journey of this past week.

Monday 10/31

My plan – as it typically is on both the last day of the month and a Monday – was to trade lightly.  And at 9:47:27 AM ET, I’d just closed out a small long trade for a modest profit.  I then tried to place another order which the platform didn’t accept.  “Great …” I’d thought with some sarcasm,“… an order entry platform issue on a Monday morning.” 

So I then checked to see if I could place a Eurex trade, which I could.  “OK, must be an issue with the CME feed.”

I then called the MF support desk and was told the Merc had suspended MF’s electronic access to the CME markets.  “WTF?  OK, let me trade Eurex as a derivative of the ES action.  Hmmmm … on second thought, maybe not … something has to be up.

The rest of the day is frankly a bit of a blur, but included morning calls to my FCM FuturePath Trading (the “Good” as I’ll explain below), a decision to request an immediate wire of my full main account balance, and calls to my long-time contacts at MF (more “Good”).

Then, an odd thing happened.  For the electronic access to the CME – which I tested by pacing orders outside the market – had been turned back ON.

A quick call to the MF support desk ensured: “What’s going on?” I asked?  “Liquidation orders only” they responded.  “Are you aware I can place opening orders??” I shot back.  Deathly silence at their end, followed by “We’re only doing what we’re told.”

I then turned my attention over the next several hours to babysitting the liquidating wire request as best I could from a distance.  Of course, it turned out that the request – which was quickly joined by requests to liquidate my other two accounts – came after all outgoing activity had been frozen.

It was during that time where the news began surfacing: Failed sale to Interactive Brokers, Bankruptcy, Frozen assets, Missing client money which by law was segregated with controls that had tested the time of many failures over the last decade.

Tuesday – Friday

The rest of the week turned into a mix of constant phone calls to FuturePath (God Bless them for putting up with me), calls to MF Global, constant internet Googling, and a lot of personal and spiritual angst over what was or wasn’t happening.

And the news — along with my human emotion — shifted by hour as both fact and rumor battled for position in my mind:

$900 Million missing. $600 Million missing. $300 Million missing.  Nothing missing … it’s all there and just an accounting issue.

I’ve retained everything.  I’ve lost everything.  Sure, it’s “only” 10% of client money as I grasped for silver linings – but what if my accounts were among the 10% … that’s essentially 100%.

And then the personal regret kicked in.  Why hadn’t I pulled the balance down?  Why did I allow myself to be distracted and “complacent” as to not see the writing on the wall during the preceding week and get the funds the heck out of there?  But they’re segregated balances reported and monitored daily.

OK, now the specific Good, Bad, & Ugly categories:

The Good (Much of it “Very”): 

God, my wife Debra, my PivotPoint partner John, Pat, Maria at MF Global, the regulatory agencies swarming to protect our interest – else this entire industry falls like a house of cards, and the entire team at FuturePath Trading – especially Damon, all of whom came to my support this week during those times when I was at best a pain in the neck, and at worst, unnerved.

You see, the vast majority of the futures industry – while competitive on the one hand – is actually a very tight-knit family of sorts.  And it was during the events of this week where we learned who were the true blue family members, and who were the black sheep.

At one point, I even found myself comforting one of my MF Global friends – who was in tears over the prospect of damage to my account – despite her difficult personal situation.

Another “good” element was my decision to initially trade lightly – as matter of generealy rule – and then to stop all trading completely on Monday as soon as I figured something was up, which left me with zero open positions as everything was unraveling.  Obvioulsly, those with open position had to wrestle with both (1) somehow closing the positions, and (2) exposing themselves to additional market time – perhaps days – and risk.

The Bad:

My personal loss of spiritual perspective at times.  From dust to dust Don.  You’re simply a temporary steward anyway. Why it took me almost three days to finally put the situation in God’s hands, I’ll never know.  For it wasn’t until Thursday morning that Deb and I prayed together for God to directly intervene and unleash his full power and might to guide the regulators to ensure His assets remained in His kingdom.  Before that, Deb had been praying for me to regain my spiritual footing!

The loss of income as trader accounts have been temporarily frozen and unaccessible during a very fertile time.

The lack of constant communication from the regulatory bodies to clients with accounts (although I do understand their challenge and the Trustee website is beginning to serve as a decent clearinghouse of sorts).

The quick - under a week – allowance for the transfer of accounts with positions and a portion of the underlying collateral to other brokers, but not for those accounts simply sitting in cash, which would be the case for most intraday and/or liquidity-providing traders.  At worst, initially moving 50%-75% of the cash this week would have been far more prudent, followed up with the rest in the near-term as assets are redeployed which by law should first go to making the cucstomers 100% whole.  I even phoned my senator’s office – both the Washington and Boston offices – for the first time ever to discuss.

The resurrection of another reason for some politicians to rally the “transaction tax” charge during – of all things – the European summit which is addressing the same thing.  Talk about poor timing.

The Ugly:

To this point, I’ve not piled on the MF Global bandwagon.  For as in any “trade”, I believe the finger first points inward, and there are of course things I could and should have done at my end.

Having said that – and taking a deep breath – there is clearly a LOT of ugly that has surfaced in recent days.

Alleged violations in the sacred fiduciary and segregation principles, along with alleged deceit with a trail requiring a team of forensic accountants and multiple regulatory agencies to unravel and which has drawn attention from the CFTC, SEC, SIPC, and FBI.

This hits particularly close to home as we’ve tried our best in this small corner of the world to help this business become more transparent over time through “truth in blogging”, bona fide education, and – now that I’m on the fund management side of the business with PivotPoint – constant communication with clients via email and weekly website Briefings that involve trade sequence explanations.  And then the industry shroud reappears … talking about swimming upstream.

A man who was all smiles in giving a speech as his company was going south.

I could go on with respect to the Ugly, but will leave it at that … adding one more category called “The Irony”.

The Irony? -

That a firm catering toward traders – who should be taught tight risk management principles in the event of a failed trade – would fail based on the excessive risk taken on by the firm itself.

A few days ago, I posted “This too shall pass.”  For in the end, there is absoultely no reason to believe that clients won’t be either made 100% whole, or pretty darn close to it.  So this is truly a bump in the road – albeit a large one.

Yet this week has reminded me why I don’t like flying in planes.  For unless I can see out the front window, can see what’s ahead, and am flying the plane (even though I’m not a pilot), I’m very, very uncomfortable.

And this week I’ve had zero control … over everything.

For some reason, I forgot who the real Pilot is.

And to Him I have to give my utmost trust.

Have a blessed weekend.