According to The New York Times, the trader at the centre of MF Global’s recent trading scandal, Evan Dooley, often entered into about 15,000 wheat futures contracts, the equivalent of around 10% of the market for these kind of contracts in any given month.
Whilst many of these trades will have been to close out opening positions, and not necessarily imply large net positions, such flow size marks out a trader in a market. As such, they are likely to become a target for other firms who will observe activity in the hope of profiting from following or countering the flow.
A high trading profile normally runs contrary to many traders instinct – most prefer not to reveal anything about their trading intentions/activity to other participants lest they utilise that information against them. However, some information leakage is inevitable when you are such a large part of a market and sometimes a trader in such a position will seek to push a market in a particular direction by “weight”, real or perceived.
Dooley took large short positions on Tuesday evening, following Monday’s wheat price shooting up by 25%. He was evidently betting that the price had overshot its’ “natural” level. However, it appears likely that several other firms decided to “squeeze” him by pushing back against the falls in price, thereby allowing them to profit when MF Global was forced to close the positions.
Of course, had they failed then Dooley could have equally been sitting on equally sizeable profits at which point he would have been regarded as a hero and trading genius, albeit with a slight smack on the risk for having taken such large bets.