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Friday, September 28, 2012

So much for efficient markets

It would certainly be interesting to hear the remaining advocates of the efficient markets hypothesis attempt to explain these recent price movements:
Broker Sent Oil Prices to Eight Month High in a Drunken Stupor

Although not authorised to invest company cash in trades Steve Perkins, a long standing, senior broker at PVM Oil Futures, had managed to spend $520 million on oil futures contracts throughout the night.On the morning of the 30th an admin clerk called Mr Perkins to ask why he had bought 7 million barrels of crude during the night. Mr Perkins had no recollection of the transactions, and it turned out that he had made the trades during a "drunken blackout."

By the time PVM had realised the transactions had not been authorised by a client, they had incurred losses of $9,763,252. Between the hours of 1.22am and 3.41am, Mr Perkins gradually bought 69 percent of the global market, whilst driving prices up from $71.40 to $73.05, by bidding higher each time.
About the only thing more patently absurd than the EMH is the myth of the rational voter.

Labels:

50 Comments:

Anonymous JartStar September 28, 2012 1:18 PM  

Efficient or not market timing is a loser's game.

Anonymous Anonymous September 28, 2012 1:20 PM  

What was he drinking?

Anonymous Vermont Guy September 28, 2012 1:24 PM  

I don't know, it sounds as if Mr. Perkins was more of a government bureaucrat for the relevant time period.

Anonymous TheVillageIdiotRet September 28, 2012 1:30 PM  

Don't drink and buy.


dannyR

Anonymous Stilicho September 28, 2012 1:31 PM  

I put it up there with the hypothetical rational economic actor since they are closely related. Anyone with one eye and half a brain can see and understand that people generally make economic decisions based upon perceived self interest and that the actions of one economic actor influence the decisions of successive actors. It's a dynamic system, subject to the influence of individuals' subjective desires. That's why the Austrian school's insight into the near impossibility of accurately measuring economic data is so important. Or, as Vox has written: no one knows anything.

Anonymous Stilicho September 28, 2012 1:33 PM  

What was he drinking?

Absinthe? Chasing the Green Goblin might induce such behavior. Why did you buy 69% of the market? Because they were coming right at me!

Anonymous buzzcut September 28, 2012 1:34 PM  

Anyone else picture one of those plastic drinking birds hitting the "Y" key over and over a la Homer Simpson?

Anonymous RedJack September 28, 2012 1:36 PM  

All systems can be gamed.

That is why so much of what is theory doesn't pan out in real life. People, and systems, don't always act the way you would think.

Blogger LP 999/Eliza September 28, 2012 1:40 PM  

Hilarious! What was he drinking AND popping? There is something more to this story of the drunk sloppy fingers.

Anonymous Mr. Nightstick September 28, 2012 1:45 PM  

I thought that the efficient market hypothesis states that this stuff happens all the time but that it gets averaged in.

Blogger Professor Hale September 28, 2012 1:54 PM  

It seems pretty efficient. Making bad buys contrary to market indicatoers resulted in huge losses. Every dollar lost is a dollar gained for someone else. Equilibrium is maintained. The only real loser is the company and it is their own fault for giving that much power to one guy to spend their money like that without oversight. They can claim it was unauthorized, but obviously, he had the pin number to log in.

Anonymous Vidad September 28, 2012 2:02 PM  

I wonder if Nate buys guns this way.

Anonymous Aeoli Pera September 28, 2012 2:04 PM  

Something about that blockquote tag didn't close right.

Anonymous Daniel September 28, 2012 2:23 PM  

This makes me feel a lot better about my own blackouts.

Anonymous Daniel September 28, 2012 2:23 PM  

This makes me feel a lot better about my own blackouts.

Anonymous Daniel September 28, 2012 2:24 PM  

This makes me feel a lot better about my own blackouts - HUH? WHAT? Computer?

Anonymous O.C. September 28, 2012 2:28 PM  

Wasn't this the plot of the latest Batman movie?

Anonymous Cryan Ryan September 28, 2012 2:56 PM  

Why do you think they call em brokers?

Anonymous zeonxavier September 28, 2012 2:58 PM  

"losses of $9,763,252. Between the hours of 1.22am and 3.41am, Mr Perkins gradually bought 69 percent of the global market"

So it cost less than $10 million to buy almost 70 percent of the futures market? No wonder guys like Soros can bring a nation's economy to its knees.

Anonymous 43rd Virginia Calalry September 28, 2012 3:05 PM  

Thank you so much for posting this, just the laugh that I needed to get the week end started off right.

Anonymous robh September 28, 2012 3:06 PM  

More likely he was 60% of the volume that day.

Anonymous WaterBoy September 28, 2012 3:13 PM  

zeonxavier: "So it cost less than $10 million to buy almost 70 percent of the futures market?"

No. The losses were almost $10 million; the total amount spent, as quoted, was $520 million.

Anonymous carnaby September 28, 2012 3:17 PM  

Uh, like, aren't markets efficient on average? This would be an outlier/anomaly.

Blogger Steffen September 28, 2012 3:17 PM  

Right, I realized that. It's still conceivable to me that planned, conscious gaming of the system would be simple enough, and done intentionally, could destroy a competitor or even turn a profit.

Blogger Giraffe September 28, 2012 3:27 PM  

For Nate, and Vidad:

Glock vs. 1911

Anonymous duckman September 28, 2012 3:29 PM  

About the only thing more patently absurd than the EMH is the myth of the rational voter.


I can prove voters are always rational with 2 words:

Adolph Hitler

Anonymous Noah B. September 28, 2012 3:33 PM  

"I wonder if Nate buys guns this way."

Unfortunately, they usually won't sell to you if you're intoxicated.

Sent from my oPhone

Anonymous Josh September 28, 2012 4:02 PM  

"usually"

Anonymous Matt September 28, 2012 4:02 PM  

You're looking at it the wrong way - this is about a solid a confirmation of the EMH as you could ask for. EMH doesn't say the market is a perfect oracle for determining "correct" prices, it just says individuals can't beat the market average by picking specific stocks and bonds.

One of the reasons you can't is because idiots like this guy introduce additional unpredictably.

Blogger Lovekraft September 28, 2012 4:40 PM  

We live in a politically-correct time, and PC thinking is, by definition, counter-intuitive. Therefore, analyzing an issue in an un-PC manner requires breaking through massive group-think.

Up is down in the PC world.

Anonymous Azimus September 28, 2012 4:54 PM  

Oh I wouldn't "So Much For Efficient Markets"... he lost $9 million in a few hours because the market was devouring a fool... maybe the market is more "Self-Correcting" than "Efficient"?

Anonymous Azimus September 28, 2012 4:55 PM  

Ahh I now I see the Good Professor had basically the same notion.

Anonymous Azimus September 28, 2012 4:57 PM  

WaterBoy September 28, 2012 3:13 PM zeonxavier: "So it cost less than $10 million to buy almost 70 percent of the futures market?"

No. The losses were almost $10 million; the total amount spent, as quoted, was $520 million.


70% of the market for one day .

Anonymous stevev September 28, 2012 5:14 PM  

he HAD to lose his job, right? Right?
Sounds like a deliberately evil, if downright lame, attempt to avoid accepting responsibility.
Reminds me of a really unfortunate night I once spent on the job, counting and recounting... and recounting service tickets while stoned. Surely a small bowl before work wouldn't be all that bad, would it?
25 years ago, but the memory still pains me.

Anonymous Rally September 28, 2012 5:21 PM  

69% of the market? That would not surprise me.

Anonymous FUBAR Nation (Ben) September 28, 2012 5:32 PM  

Voters are rational. Most of them vote for the guy that gives them the most free stuff.

Anonymous WaterBoy September 28, 2012 5:57 PM  

Azimus: "70% of the market for one day ."

Not the point. The mistake which I was addressing was in identifying the $10 million as the amount spent; the actual amount spent to purchase those 7 million barrels was $520 million (around the $71.40 to $73.05 range stated, given rounding of big numbers).

That volume then lost almost $10 million in value before it was discovered what had happened.

It makes a difference. Hell, if I had the opportunity to buy 7 million barrels @ $1.43/barrel, I'd have done the same thing.

Anonymous Cobre September 28, 2012 7:20 PM  

Kind of a head scratcher of a post, VD... what does this have to do with efficient markets again? Simple case of someone buying above their credit when the trading firm didn't have risk controls properly in place.

- Calling this recent is sketchy... 2009? That was ages ago in trader time.

- The volume is misleading. They meant that he bought 69% during that time step overnight. Looking at exchange data from 6/30/09, the front month volume on the NYMEX alone that day was just under 264,000 contracts. That's nearly 264mm bbl of WTI futures (total daily volume was probably another 100,000 contracts or 100mm bbl north of that when including the forward curve). 7mm bbl is substantial, but nothing in the ballpark to be seven-tenths of a day's trade.

- What they didn't put in there was that WTI closed the prior session at $71.49, opened 6/30 at $71.60, then hit an intraday peak of $73.38 before closing at $69.89... supported by the 10-day moving average of $68.76. So basically the market sold the high.

- I can't remember which precise fundamentals were driving the market on that day, but two general points... 1) Crude had been surging since the QE announced in March 2009, the price had jumped 45% from the settle on 3/18 to close on 6/30; the time between Memorial Day and the Fourth of July is often a bullish run due to the domestic driving season. Note that the peak price action that day was actually only 15 cents above a rally at $72.23 three weeks before. Little bit of a double top on the larger chart. Traders immediately faded the high as well as driving season dynamics... contract was below $60 by 7/10.

- Here's a quick chart to show what happened in a 10-day band around that session. http://i46.tinypic.com/a2yk2r.png

Again, this was just bad behavior and a costly mistake. This isn't to argue for efficient markets, just to point out that I do not believe this is a good example of them.

Anonymous Cobre September 28, 2012 7:27 PM  

^I meant... not a good example for inefficient markets.

Blogger Rahul September 28, 2012 7:32 PM  

How can we have EMH when you have the Working Group on Financial Markets rigging markets like this? Or the Fed? Or the Exchange Stabilization Fund?

Anonymous Jesse September 28, 2012 7:59 PM  

Dood this story is from 2009. WTF at least the Apple bashing is current. That being said i am curious as to why gas prices are going up this fall when they used to rise during the summer months.

Anonymous The other skeptic September 28, 2012 8:23 PM  

Perhaps they are as efficient as the ATF.

Why are the ATF profiling Hispanic Gun Purchasers

Maybe they are trying to get back some of those guns that walked.

Anonymous The other skeptic September 28, 2012 8:38 PM  

Maybe as efficient as the ATF.

They are now doing some profiling of Hispanic Gun Purchasers

They are probably trying to get back some of those guns that walked.

Anonymous zen0 September 28, 2012 10:14 PM  

Maybe this one reason is why they went to high-frequency robo trading. They only get drunk on power.

Anonymous JP (real one) September 28, 2012 10:17 PM  

"Efficient or not market timing is a loser's game."

B.S. There are plenty of ways to time the market. They don't work all the time, but they do better than "buy-n-hope" over the long run. I used market timing to sidestep half of the crash in 2008 and fully recouped my losses within a year. The S&P 500, on the other hand, is still 100 points lower than it was 5 years ago.

Anonymous Outlaw X September 28, 2012 10:57 PM  

"Dood this story is from 2009. WTF at least the Apple bashing is current. That being said i am curious as to why gas prices are going up this fall when they used to rise during the summer months."

Jesse

Look at the October futures on gasoline riding up before the election and then look at Nov and Dec. I t is clear the traders want Obama out, which suits me. At least Romney will have to rearrange the deck chairs and buy us some time.


http://www.cmegroup.com/trading/energy/refined-products/rbob-gasoline.html

Anonymous Cobre September 28, 2012 11:55 PM  

You just witnessed an expiry short squeeze, and it had nothing to do with spite for Obama. You had OCT/NOV in backwardation by a full 42 cents as OCT rolled off the board today, up from under just a quarter yesterday... 42 cents on a $3 handle is ridiculous, classic squeeze. Go look at the link you posted and see the V/X spread. Plain as day.

Domestic supply is at four-year lows as refinery output is down. PADD 1 supply is extremely low, which is providing underlying support as it skews the greater supply view (http://www.eia.gov/oog/info/twip/twip_gasoline.html). Oh, and there was an explosion at Irving this week. Are refiners running supply down because they don't like Obama or because of economics on their runs?

None of this is new news other than the explosion -- look back at this Feb wire piece:

"NEW YORK, Feb 27 (Reuters) - The U.S. Northeast should expect price spikes in gasoline and ultra-low sulfur diesel if Sunoco Inc's Philadelphia refinery shuts down this summer, the U.S. Energy Information Administration said on Monday."

Either way, this has nothing to do with the original story of a guy putting on crude length overnight in thin trading only to get faded during the day session... 39 months ago! There was nothing sketchy about that at all, and the market wiped out gains and then some the same day. Again, I'm not arguing that this is good example of efficient markets, but that this story wasn't quite as the link presented it. If you wanted to buy or sell serious size like that into any illiquid commodity market overnight on CME Globex you would typically create more volatility than during the day. And if you did it randomly*, you could get thumped like the moron in the story did.

*Maybe it wasn't even all drunken randomness (though taking one-twentieth of that kind of size wrongway is a career killer). It was the last trading day of the month. He could have had a view on Chicago PMI that day or the ISM's PMI, Chinese manufacturing, employment which would be dumped at the front of July.




Anonymous The other skeptic September 29, 2012 12:58 AM  

Look at the October futures on gasoline riding up before the election and then look at Nov and Dec. I t is clear the traders want Obama out, which suits me. At least Romney will have to rearrange the deck chairs and buy us some time.

Yeah, I know. Better that the collapse occurs after we are dead, eh?

Our kids can deal with it.

Anonymous Outlaw X September 29, 2012 4:32 AM  

"Yeah, I know. Better that the collapse occurs after we are dead, eh?

Our kids can deal with it."

Some people are already dead, Obama Ain't going to fix it, neither is Romney. Your objection is what?

Anonymous Joe Winpisinger September 30, 2012 5:50 PM  

This is nuts...

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