John Bates
06-30-2010 03:59 PM
The news that Steven Perkins, (former) oil futures broker in the London office of PVM Oil Futures, has been fined 72,000 pounds ($108,400) by the FSA and banned from working in the industry is no surprise, see article here:
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It could have been worse given that the broker, after a few days of heavy drinking, took on a 7.0 million barrel long position on crude oil in the middle of the night. The fine seems miniscule since it cost PVM somewhere in the vicinity of $10 million - after unwinding the $500+ million position.
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The surprising thing about this incident is that it happened at all. Perkins was a broker, not a trader. He acted on behalf of traders, placing orders on the Intercontinental Exchange among other places. That he could go into the trading system and sneak through 7.0 million barrels without a customer on the other side is unbelievable.
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Heavy drinking is practically a job requirement in the oil industry, my sources tell me, so this kind of thing could be a real issue going forward. As algorithmic trading takes hold in the energy markets, trading may approach the ultra high speeds seen in equities markets. �This is a recipe for super high speed disaster, unless there are proper controls in place - especially if there were a way for the broker or trader in question to enrich himself in the process.
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One powerful way to prevent this kind of accident or fraud is through the use of stringent pre-trade risk controls. The benefits of being able to pro-actively monitor trades include catching "fat fingered" errors, preventing trading limits from being breached, and even warning brokers and regulators of potential fraud - all of which cost brokers, traders and regulators money. PVM is a good example of this.
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Ultra-low-latency pre-trade risk management can be achieved by brokers without compromising speed of access. �One solution is a low latency "risk firewall" utilizing complex event processing as its core, which can be benchmarked in the low microseconds. �Errors can be caught in real-time, before they can reach the exchange. Heaving that drunken trader right overboard, and his trades into the bin.
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