Failure of biggest and best shakes markets


In my eyes it wasn't Greece that stole the headlines last week, rather the collapse of international broking and settlement firm MF Global, run by ex-Goldman Sachs chairman Jon Corzine.

When MF Global filed for Chapter 11 bankruptcy protection in New York on Monday last week it sent a shiver through world markets - and I'm not just talking equities.

MF Global, formerly known as Man Financial, provided exchange-traded derivatives, such as futures and options, as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting.

The areas of the market in which MF Global specialised are usually reserved for professional traders and investors and focus on very sophisticated trading techniques.

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However, the net was spread wider when the ASX was forced to suspend trading to protect market integrity in two small commodity futures markets, grain and wool, which the company dominated.

This revelation gave the grain and wool growers of Australia a rare glimpse of the commodity futures markets that are used, among other things, to hedge the price of their produce on a daily basis - and astute growers out there would have been shocked by what they saw.

The first question is, how did one company, in this case MF Global, come to dominate grain and wool futures markets in Australia?

The simple answer to this is that when it came to futures markets, MF Global was the biggest and the best.

From a trader's perspective, to reduce the risk of something like this happening you want to trade with the largest player in the game.

This led to most commodities traders using MF Global to clear their trades, creating a market concentration risk that was realised only when the large player faltered.

This concentration risk is something that the ASX needs to seriously consider across its other markets because suspending trade in a market is not something that should be happening in 2011.

This follows the still unexplained four-hour long market glitch that the ASX encountered in late October when all ASX markets were off-line and unable to trade. So what tipped MF Global over the edge? Although affected by the collapse it should be made clear that it was not the Australian arm of the MF Global business that was at fault.

It appears that a string of losses from European public debt holdings, which obviously would have been subject to the 50 per cent haircuts nutted out last week by European leaders, were what broke the back of the parent company based in the US.

Once the parent company failed there was nothing the Australian arm of the business could do but to follow.

Now you could speculate that the company had a strategy that was too aggressive, that Corzine was trying to make MF Global the next Goldman Sachs, or that traders didn't know how to spell risk management, let alone implement it, but I'll leave that to the formal FBI investigation that has been launched in Washington.

·For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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