CME Group Statement on Vanity Fair Article

The referenced article: https://www.vanityfair.com/news/2019/10/the-mystery-of-the-t...

Edited to add the HN link: https://news.ycombinator.com/item?id=21278009

If you happened to be one of the lucky people who bought options on a stock, index or whatever and in 24-48 hours it goes from being out of the money to deep in the money, all these algorithms kick off and your name ends up on a list with the SEC. Next they start pulling your bank records and brokerage account records (which they have instant access to) to check for the obvious such as how old is this account, how often does it trade, how often you get lucky, where does your wife work, etc (last one is not a joke, they watch for people married to lawyers and such). As the flags go off, more people get involved, phones calls get made and accounts start getting frozen and then some dude wearing dark glasses on a cloudy day shows up at your office.

Say what you will about government agencies, the SEC takes insider trading very seriously and they are very well equipped to deal with it. Something so obvious happens from time to time but rarely works. At least not on a scale to move markets (a couple million here and there is nothing in grand scheme of things but even that gets caught). I’m a little skeptical here.

This is a pretty big allegation, and though I work in the energy sector and have a working but limited knowledge of the way these markets work, it’s just not as simple as the article implies. As mentioned in the slate article, these are likely but hedges against other trades either in physical markets or other financial markets. These trades mean someone loses just as much as the winner wins. Futures markets are typically just risk management trades and not speculative, at least in my experience with this stuff.

Matt Levine wrote today:

"the evidence for this conspiracy theory is not even that sometimes there were big futures trades shortly before big geopolitical events. The evidence for this conspiracy theory is that there were futures trades shortly before big geopolitical events. Like, a lot of futures contracts traded, but not all in one big trade. Not one person buying 386,000 contracts, but 386,000 contracts trading, in thousands of individual trades between unrelated traders. The evidence for the theory is essentially “people traded S&P futures the day before weird Trump stuff happened.” But people trade S&P futures every day! Lots of them! Billions and billions of dollars’ worth, in lots of trades! It’s an incredibly active and liquid market! This is … I mean, this is what a market is. People buy stocks, and people sell stocks, and if you just add up all the people who buy stocks before the stock market goes up then they will have made a lot of money, but that’s not because they were all tipped off, it’s because there is no other way anything could possibly work, come on."

IMO this won't stop until someone with a good amount of cash sues one of these mainstream outlets for slander/libel/defamation and wins, taking down the outlet, Gawker-style. The larger the target, the better.

I'm all for freedom of the press, but in recent years there's complete lack of accountability, where people write complete bullshit, _knowing_ it's not true, to chase the clicks or score political points, and then retract it on the back page days later, or not at all. And of course, nobody reads the retractions. There needs to be a modicum of fact checking applied to all this, as it was, say, 20 years ago.

As an ex-derivatives trader, the Vanity Fair article leaves me short of evidence for anything nefarious.

First of all, Trump tweets a lot. You wonder if he does anything else.

Second, the market trades a lot. S&P minis are possibly the most liquid market anyone can think of (10yr future? Dunno).

Third, a lot of derivs trades are misunderstood. For example, when I was running a fund someone sent me an article suggesting China had abandoned capitalism. Their evidence was a massive open interest in some S&P put strike. Turned out it was just a big box trade, which by its nature can take up a lot more contracts than risky bets.

https://en.wikipedia.org/wiki/Box_spread_(options)

My main thought about these big trades is they might well be hedges. Perhaps someone running an ETF or other index linked product managed to land some customers and needed to match the exposure.

In any case, I doubt it's insider trading. The regulators are very good at finding even very small cases. You read about it now and again that someone who isn't even in the US got busted making themselves a few hundred grand.

I'm honestly shocked that anyone here would take that Vanity Fair article seriously. It made no attempt whatsoever to link the trades to one another. The events in question were diverse, and would have required access to many very disparate sources of insider information. And most importantly, the article made no attempt to establish that these trades were unusual. How common are trades of that magnitude? Such a basic question, left completely unaddressed. It's mind numbing that they would think it's acceptable to publish something that lacking in critical thinking.

30 points in S&P is 1%, that’s an everyday range.

Beside, who said the short there is not profit taken or people bailing out or even arbitrary trades.

Two sides to every trade. More curious which side lost their shirt.

Disclaimer: I used to work there years ago as a programmer and got a lot of exposure to this stuff. My opinions are my own and that's all these are.

I think this article is a bit over-hyped. I know in my circle we sorta joke that trump trades on his tweets, or has cronies/staffers/friends that do, and he probably does. I'm sincerely not sure how anyone would know for sure, that's beyond me.

In any case, by the time things hit the exchange it's mostly just brokers and market makers. There's few "people" that trade directly on exchanges. Some big firms, sure. But I doubt any one person profited heavily from this. Another thing to remember, you've gotta have the money to actually buy all these in the first place and that's a lot put on the table. 82k contracts at the money, about a month out right now would cost me ~$84mm. I'm sure insiders get better margin rates than me but that still gives some idea as to the barrier of entry for this kind of trade.

If the traders expected a large move, why trade all at the final hours? Why not spread the volume over a few hours or, hell, even days like the article alleges they had on occasions?

There's entire teams of people at large brokerages and banks that work specifically on hiding their large trades among the normal volume, so competitors don't intentionally try to ride the large, incoming volume. Any coordinated effort would've probably participated in such a process or done something similar.

The article also mentions just the futures, but doesn't say what strike and expiry. Depending on these, it greatly effects the actual outcome and cost of entry. These would also be interesting bits of journalism as it would speak to the level of risk assumed in these bets: way in the money = safe, way out = risky, short-dated=risky, far-out=safe. This suggests to me that the author doesn't really know how these contracts work?

Similarly, these types of securities are a more of a zero-sum game than equities, someone was on the losing side of those trades and they thought whatever position they took was worth the premium paid to them. There's really no "averaging down" in derivatives in the same way as equities, they expire and so does their value. Again, how quickly this happens depends on the contract expiry which the author omitted.

Lastly, derivatives traders love volatility. This presidency and recent world events have created lots of volatility. It's no surprise these contracts are seeing lots of activity.

I guess I just don't really see the plausibility to this and the article itself is painfully uninformative.

Somewhat related story time:

I used to sit and watch the pit the e minis traded in close on occasion--always kinda quiet towards the end of the day until the very end when things picked up. E minis still got quite a bit of volume through the pits at the time. Trading in my own time years later--much of the volume is on the open and the close electronically as well.

Going to meetups with pit traders, I remember a few here and there getting blitzed and rambling about market makers front-running them somehow and being able to out compete them because "AI" and "algorithms." But really they just moved faster and could act on more data than small shops or retail.

The CTO of a market-maker gave a talked I attended and he described how people yelling and arguing in the pits was such an obvious battle at the "forefront of capitalism" and people sort of understood and accepting of that. However, the fear the silence and all that they don't know about the computer and it's algorithms.-- I think all people somewhat fear finance, derivatives especially, in the same sort way. What you don't understand or see regularly can be strange or unsettling.

Obviously I have somewhat rose-tinted glasses on the subject.

In related news: "People don't understand financial markets ... AT ALL"

Literally one sentence response. Why so little? If it’s patently false prove it.

Oh, "These transactions were entered into by a significant number of diverse market participants."? So, the insider info was shared widely?

Well CME - if the allegations in Vanity Fair are indeed false, why not sue them for libel/publishing materially false information harmful to your company? Surely it would be a slam dunk case. Otherwise, I'm tempted to side with the investigative journalism that resulted in a dozen-paragraph article with facts and figures, over your "that's not true" one-liner.