The WSJ vs Christopher Pia

By Felix Salmon
August 20, 2010
Susan Pulliam, splashing it across the front page of both the newspaper and the website:

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The WSJ is going big today on this shocker from Susan Pulliam, splashing it across the front page of both the newspaper and the website:

The hedge-fund industry has been rocked over the past year by allegations that fund managers reaped illegal profits by trading stocks based on inside information. The investigation of Mr. Pia and the case against Moore suggest that commodities trading also can be an insiders game—a market where big investors may be able to throw their weight around to move prices to their advantage.

Really: that’s the shocker. Apparently traders sometimes try to move markets in commodities! Which, of course, is something so ingrained in popular culture that they were making blockbuster movies about it back in 1983.

Is the problem getting worse? Pulliam suggests that it is, talking about “a kind of improper trading that regulators worry is becoming more widespread”:

Cases involving investors trying to artificially move commodities prices are nothing new. But abusive trading practices have become more prevalent, says Bart Chilton, a CFTC commissioner, because regulators, until recently, have lacked the tools needed to aggressively go after and punish wrongdoers.

Over the long term, supply and demand dictates prices in the commodities markets. What concerns regulators, for the most part, are efforts to move prices over the short term. The growing number of large investors speculating in commodities has created “aberrations” that can present the “opportunity for foul play,” says Mr. Chilton.

This doesn’t make a great deal of sense. Commodities markets have always been largely unregulated, so that in and of itself wouldn’t explain why this kind of trading might be increasingly common. And if the number of large investors in the market is growing, why would that increase the frequency of price aberrations, which are normally a symptom of illiquidity?

Pulliam concentrates on one trader, Christopher Pia, but the only activity she ever talks about involves him buying large amounts of a certain instrument in the hope that doing so would move the market. That might be abusive, but it’s also been a standard part of the commodity-trading arsenal for decades. It’s also very dangerous for the trader in question: if the market gets wind of what he’s doing, he can lose a huge amount of money very quickly.

What’s more, I’m pretty sure that Pulliam is off by a factor of 100 when she tries to explain one of Pia’s trades:

In 2008, for example, Mr. Pia entered into a trade under which Moore would get a $25 million payout if the New Zealand dollar rose to a certain level. Goldman Sachs Group Inc. was on the hook to make the payout. If that level wasn’t hit, Moore stood to lose $1 million.

As the trade’s expiration date approached, the New Zealand dollar was trading about 25 cents below the price at which the contract would pay out. Mr. Pia got clearance from top Moore officials to spend billions buying New Zealand dollars, hoping the currency would hit the set price, according to the person with knowledge of the trade. Fifteen minutes before the contract expired, Mr. Pia began buying billions of New Zealand dollars, lifting the currency to the price at which Moore was able to collect the $25 million, the person says.

Gary Cohn, Goldman’s president, later congratulated Mr. Pia on the trade, the person says.

The kiwi dollar exchange rate is certainly volatile, but no trader would ever dream of trying to engineer a move of 25 cents. A quarter of a cent, maybe. And as Goldman’s reaction shows, this is the kind of trade which is more likely to get respect on Wall Street than to trigger an investigation into market manipulation.

The investigation of Pia and Moore seems to be par for the course when it comes to these kind of things: allegations are made, questions are asked, and at the end of the day everything’s pretty inconclusive. The trader in question has plausible deniability (“Mr. Pia said his last-minute timing was intended to thwart rival traders who often would try and buy ahead of Moore’s orders”), and no excess profits seem to have been made.

It’s possible that the ongoing CFTC investigation into Pia’s trading will result in some kind of censure or sanction. But even if it does, that’s not big news, it’s just the CFTC doing its job. I know that this is a slow news month, but I still can’t see much of anything here, let alone the “Wild Trading in Metals” promised in the WSJ’s headline. I’m sure that Moore Capital accounted for most of the volume in palladium for a few minutes on a few separate days. But that really is not a big deal, and it’s pretty sensationalist of the WSJ to compare it to much sleazier and much more illegal insider trading or pump-and-dump schemes in the stock market.

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