Commodity broker MF Global has hired external risk consultants to review its order entry systems after a trader dealing in wheat futures was able to exceed his limit order and place unauthorised trades that will cost the firm $141.5 million in losses.
In a statement MF Global says during the early hours of Wednesday morning the broker - who was later named as Evan Dooley from its Memphis office - was trading in the wheat futures market in his personal account and "substantially exceeded his authorised trading limit".
According to a Wall Street Journal (WSJ) report, which cites "a person familiar with the situation", Dooley was betting that wheat prices would fall from recent highs and entered into the trades between midnight and 7 am Eastern time Wednesday.
The Chicago Board of Trade handled the orders, says the report. But by Wednesday morning, though, wheat prices were moving higher, so Dooley was racking up losses that exceeded the balance in his trading account. MF Global was then forced to step in and fund the trader's losing positions.
"A failure in one of the company's retail order entry systems permitted the representative to establish significant positions in his own account which were liquidated later that morning," says MF Global's statement. "The unauthorised activity resulted in him incurring a loss of $141.5 million."
Dooley, who is reported to be a former Refco trader who joined MF Global in November 2005, was fired on Wednesday after his losses were discovered.
As he was trading in his own personal account - rather than MF Global's account or on behalf of a client - any profit that Dooley made would have been his own, but MF Global is responsible for the loss because it is a clearing member.
"The company, as a clearing member, is responsible to settle at the clearing house," says the broker's statement. "As a result, the company recorded a bad debt provision for the full amount."
MF Global, which was spun off from hedge fund Man Group last year, says it believes it has made the appropriate adjustments to its order entry systems to prevent a recurrence of unauthorised trading of this type again.
In addition, the broker has recruited third-party risk technology consultant - reported to be FTI Consulting - to review its order entry systems.
The incident raises new questions about risk controls at brokerage firms and banks, particularly as it comes just weeks after the much bigger loss incurred by Société Générale, which lost EUR5bn in a rogue trading scandal that is has blamed on former junior trader Jerome Kerviel.