What shall we do with a drunken trader, early in the morning?

What shall we do with a drunken trader, early in the morning?

The regulator fined Perkins £72,000 for market abuse and banned him from working in the financial services industry on the grounds that he is not a fit and proper person.

In the early hours of Tuesday June 30 2009, Perkins, who was licensed only to trade Brent crude futures on behalf of a client, executed a high volume proprietary trade in excess of 7,000 lots, representing over 7m barrels of oil, without client authorisation. PVM lost nearly $10m when it had to close out the unauthorised positions, a spokesperson said.

As a direct result of Perkins’ activity, the FSA said, the price of Brent rose significantly. Perkins’ trading manipulated the crude market by giving a false and misleading impression as to the supply, demand and price of Brent, and caused the price to increase to an abnormal and artificial level.

Last summer, on a typical day, between 100,000 and 130,000 contracts were traded in the front month of ICE Futures Europe’s Brent Crude Oil futures. Each contract represents 1,000 barrels of oil, so total trading is usually 100m-130m barrels of oil a day. Global consumption of all oil was then around 85m barrels a day.

On June 30, there was abnormally busy – though not unprecedented – trade, totalling 173,945 contracts. What was particularly unusual was that there were two spikes of activity, and one of these was in the small hours of the morning London time, when there is usually minimal trading.

Trading data from ICE Futures Europe published on FT.com at the time showed that the first spike occurred between 1am – when the market opens for the day after a two hour break – and 4am.

During these three hours a total of 11,744 front month contracts were exchanged – representing 11.74m barrels of Brent crude for August delivery. Normally perhaps 600 contracts might be traded during these hours.

It appears likely that Perkins’ activity contributed strongly to a jump in the oil price to $73.50 a barrel between 2 and 2.30am London time, after it had opened at $71.30 at 1am. Brent later closed at $69.23 at 4pm.

“Drunkenness does not excuse market abuse”

The FSA asserted that Perkins’ trading appeared to be the result of extremely heavy drinking due to alcoholism, which he now acknowledges. Perkins drank excessively over the weekend before Monday June 29, and throughout the day itself.

In sanctioning Perkins, the regulator took into account the fact that Perkins had initially lied repeatedly to his employer to try and cover up his unauthorised trading.

Immediately after this incident, however, Perkins joined a rehabilitation programme for alcoholics, and he has now stopped drinking. The FSA chose to limit the ban to five years, suggesting that Perkins may be rehabilitated over time and may be fit and proper again in the future.

Alexander Justham, director of markets at the FSA, said in a statement: “The FSA views market manipulation extremely seriously. Perkins’ trading caused disruption to the market and has been met with both a fine and prohibition. This reinforces the fact that a severe sanction will apply in cases of market manipulation, even where no profit is made.

“Perkins’ drunkenness does not excuse his market abuse. Perkins has been banned because he is not a fit and proper person to be involved in regulated activities and his behaviour posed a risk to the proper functioning of the market.”

Perkins had been due a £150,000 fine, though the FSA acknowledged that this would cause him serious financial hardship. The fine was therefore reduced to £90,000. Given Perkins’ agreed settlement of the case, he also qualified for a 20% discount under the FSA’s executive settlement procedures.

Tom Osborn +44 207 779 8361 tosborn@fow.com

Thought Leaders

SmartStream RDU gears up for Mifid II challenge

SmartStream won the FOW Award for best new technology product in both the trade...

Total Return Futures - a real-life example for futurisation

Eurex won the FOW Prop Traders' exchange of the year award

ABN AMRO Clearing is optimistic about the future of proprietary trading

ABN AMRO Clearing won the award for proprietary traders' clearing firm of the...

Wematch: Shining a light on collateral and securities financing

Wematch discusses regulatory tailwinds, building liquidity and supporting banks...