THE BLOG
07/12/2010 05:36 pm ET | Updated May 25, 2011

Market Monkeys Guarding Bananas Again

The tale of the tipsy oil trader in 2009 who went on a binge of drinking and manipulating the world's oil market captured headlines as an amusing story when he was recently punished by British authorities.

But his story illustrates how vulnerable the world's financial system remains. Stephen Perkins, the 34-year-old trader, was fined and kicked out of the business for five years by Britain's Financial Services Authority early this month. But the affair, plus the still-mysterious $1-trillion "flash crash" of May 6, which resulted in a temporary stock market dive, points out that access to the world's digital trading grid is not properly monitored.

Perkins had worked since 1998 for the world's largest oil trader, PMV Oil Futures Ltd. in London. In late June 2009, he got drunk at a golf tournament, then continued to binge at home all night as he bought and sold hundreds of millions of dollars' worth of oil contracts. His overnight trading represented 17 times the normal amount and he singlehandedly increased the price of oil by US$2 a barrel to US$73.50 a barrel. It doesn't sound like much but he established a new high up to that point in spring 2009.

His employer called him at home the next day to ask who his client was, after he committed US$600 million without so much as a form filled in. He told them he had a client and when they discovered shortly after that he didn't, and had been drunk, he was fired and security officials were called.

His offense was defined as "market abuse". His employer was not fined at all because it had lost US$10 million unwinding the trades and convinced authorities that it was a "victim of unauthorized trading."

The point is that PMV was responsible for whoever traded under their banner, or should have been. So are other financial firms who do not have safeguards and therefore permit access by the irresponsible to trading privileges.

PMV's failure to police and limit its traders, in or out of the office, to the world's trading grid should have been enough to take away its license for good, if for no other reason than to set an example that would frighten others into protecting the world's financial system.

The probe into the "flash crash" has yet to report the cause, but whatever it is will provide another example that the system is dangerously unpoliced and that manipulative, or otherwise errant, behavior is unchecked.

FSA made no criticism of PVM, nor did other regulators around the world. This constitutes a regulatory lapse which undermines the integrity of markets themselves, prices and could damage the global economy once again or help unscrupulous players enrich themselves at the expense of others.

Much attention is devoted to preventing hacking into the world's financial systems. The case of the tipsy trader exposes the fact that the greatest danger may not lie outside, but within an industry that doesn't police itself properly.

This appeared in the Financial Post