Former Morgan Stanley Smith Barney Trader's $1 Billion Position Causes $15 Million Loss

March 6, 2012

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, JaredWeinryt submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.In the Matter of Jared Weinryt,Respondent(AWC 20090188410, February 29, 2012).

The Trader

Jared Weinryt became registered in 2006 with Morgan Stanley & Co., Inc., where he was employed at the firm's San Francisco office as a Fixed Income Analyst.  Subsequently,Weinryt transferred to Morgan Stanley's Purchase, NY headquarters, where in August 2008, he became a Trader on the firm's Agency Desk. Agency Desk traders typically  facilitate client orders, hedge their positions, and take directional views on the market.

In January 2009, Weinryt was assigned to the desk's Five-Year Agency book, over which he assumed responsibility.  In this new role, he traded federal agency products (Fannie Mae andFreddieMac) in a "cash book" and futures contracts (Eurodollar and Treasuries) in a "futures book."  Weinryt was permitted to trade remotely in order to facilitate after-hours trading and to give him the ability to better react to developing global events. As a result of the May 2009 joint venture of Morgan Stanley with Citigroup's Smith Barney, Weinryt'sregistrations were with Morgan Stanley SmithBarney Holdings LLC ("MSSB") until his voluntary termination on July 15, 2009.  According to the AWC, he had no prior disciplinary history.

Position Limits

In July 2009, MSSB's Agency Desk had a position limit of $350 million and Weinryt had a personal position limit of $85 million.

By the end of the trading day on July 14, 2009, Weinryt had accumulated a futures position of approximately $744 million  - more than double the Agency Desk's position limit and multiples beyond his personal position limit. Beginning around 8:00 p.m. that night, Weinryt continued trading futures from his remote location at home, and, by 5 a.m. the following morning, his gross holdings in Eurodollar and Treasury futures had mushroomed to $1.33 Billion.

During the morning of July 15, 2009, the market turned against Weinryt's positions, prompting him to attempt to reduce his holdings.  While he was engaged in these early hours' trades, MSSB was alerted to a risk anomaly, which was then traced toWeinryt. This discovery resulted in MSSB cutting off of Weinryt's access to the firm's trading system by late morning.  By 11:00 a.m., Weinryt had reduced his cumulative position to $740 Million but withthe result that the Five-Year Agency book had realized about a $4.7 Million loss. Thereafter, between 11:30 a.m. and 3:00 p.m., MSSB liquidated some 75% of Weinryt's remaining contracts, resulting in two-day accumulated realized losses in the proprietary account of over $14.9 Million. Note: Because these trades occurred in MSSB'sproprietary account, there were no customer losses.

FINRA Sanctions

As a result of its investigation, FINRA alleged thatWeinryt had violated FINRA Rule 2010 by executing unauthorized proprietary trades in excess of his position limit. In accordance with the terms of the AWC, FINRA imposed the following sanctions on Weinryt:

  • two-month suspension in all capacities;
  • one year suspension from acting in the capacity of trader or performing any broker-dealer trading functions; and
  • $7,500 fine.

Bill Singer's Comment

Welcome to the fast-paced world of Wall Street. The industry and its regulators would like us all to believe that there are effective risk-management tools in place and high-powered computers are sniffing out anomalies in real time. Yeah, sure - ummm, tell me again, what caused the May 6, 2010 "Flash Crash?"  Oh, yeah, I forgot, y'all are still working on that one.

So, no, it comes as no surprise to me that one trader on the desk of a major financial services firm could be sitting home, perhaps in his pajamas, entering trades, accumulating a lousy billion dollar or so position, and not only did all of this put him far beyond his personal and his desk's capital limits, but, by the time the risk folks sniffed it all out, the firm would eat about $14 Million in losses.  Sort of like a fire alarm that goes off after your house burns down. Wonderful.

The way I see this, Wall Street's risk systems aren't quite up to snuff - or, perhaps, the systems are geared to the 17th and 18h Century habit of using snuff but not quite adjusted to the modern age. I mean, c'mon, isn't there something seriously wrong when a trader is limited to an $85 Million personal position but he enters into over $1 Billion in transactions and it takes until the following day for his firm to hear the alarm and react?  You'd sort of think that once the personal limit was reached that access to the order desk would have been terminated subject to a supervisor's override.

Then there's the equally disturbing regulatory aspect of this case. In July 2009, Weinryt put on the trades at issue but Wall Street's self-regulatory organization FINRA is only now - some 2 1/2 years later! - getting around to settling the case.  Imagine if Weinryt contested FINRA's case to verdict at a hearing. How much longer would that have taken?

So, what's it like out there on the Street these days?  According to this case, a trader can be limited by his firm to $85 Million in positions but, trading from home, he can explode past that cap to over $1 Billion, and it may take a bit for his firm to discover the position-limit violation and to shut him down - and then there's the whole issue of the cost of such undetected trading. Exacerbating this situation is an industry cop that requires two and one-half years to settle such a case.

No urgency. No rush. No worry. Be Happy. Flash. Crash.