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MF Global, which went into administration on Monday, was a brokerage-that-wanted-to-be-a-bank under the leadership of former Goldman Sachs ceo Jon Corzine.
But the business model Corzine aspired to had already moved on.
Investment banks have closed proprietary trading desks in response to the Volcker rule which, in the wake of the financial crisis of 2008, sought to minimise the risk to the global financial system from banks betting on markets.
Corzine, by contrast, sought to take on trading risk that the big banks could no longer sanction.
Traders tell MB that the strategy that moved Corzine to take on exposure to European sovereign debt was also seen across the company.
Metal brokers, whose chief business was client execution, were nonetheless encouraged to boost the risk they ran in metal markets as part of Corzine’s goal of creating a mini-Goldman.
Corzine himself was often glued to his screen at MF Global, sources close to the situation said.
This is a necessity for a trader, and imparts crucial market knowledge to the head of a brokerage.
But some suggest that he should have been less focused on positions, while paying more attention to staff, shareholders, clients and the brokerage business.
MF Global’s move into administration graphically demonstrates the consequences of exposure to European sovereign debt, and may cause clients to look again at the proprietary risk their brokerages are taking.
But, as exchanges, clearing houses and brokers in different jurisdictions go about transferring and liquidating positions, it will have other consequences too.
In the words of one source in the futures market, who monitors international regulations closely: “This has absolutely played into the hands of the politicians and regulators who are talking about proprietary trading as though it is an inherently dangerous thing.”
The question now is how regulators will respond.
Will they attempt to limit the trading risk taken on by brokerages, and if so, how?
Click here to read all of MB’s news coverage of the collapse of MF Global