- A Vanity Fair story alleged to show shady trading in the stock futures market that happened just before major headlines involving President Donald Trump’s trade war with China.
- By linking supposedly shady trades to Trump, the story gained widespread attention.
- But the claims about the trades made in the story make little sense and appear to be typical futures trading activity.
- The virality of the story shows how people are willing to believe flimsy claims if they confirm their priors, especially when it comes to Trump.
- George Pearkes is the global macro strategist for Bespoke Investment Group.
- Visit Business Insider’s homepage for more stories.
This week Vanity Fair readers were treated to a claim that by simply reading the futures tape they could see clear evidence of financial wrongdoing by someone connected to the Trump administration. Those claims are ridiculous and suckered in readers desperate to have their assumptions about wrongdoing by Trump administration officials confirmed.
The claims of ‘shady trades’ make no sense
In the article, William D. Cohan identifies four distinct instances where late-session futures trades turned out to be very profitable for whoever put them on.
It took me a bit of puzzling to understand what exact blocks of trades were being alleged, because the author misidentified one basic piece of information. Cohan refers to the trades happening near the close for electronically traded e-mini futures contracts, which is 5 p.m. ET. But based on my review of the data, the volume surges actually took place near the closing time for a totally different market, the cash equity market, which is 4 p.m.
In the Vanity Fair piece, Cohan makes claims about the volumes in futures markets indicating specific directional bets on price — that is, large bets that the market will go up or down. For instance, on September 13, he claims that “he or she, or a group of people, sold short 120,000 ‘S&P e-minis’ … when the index was trading around 3010.” The time window for this trade was said to be 3:50 p.m.
But a review of the data for that period shows no single transaction for more than 10,000 contracts after the 11 a.m. hour that day. No large off-exchange transactions (“block” trades reported to the exchange on a delay) were reported either.
In fact, the data shows only 138,760 contracts traded in total during the 10-minute window between 3:50 and 4.
Put another way, instead of one big trade happening at that time by one trader, the total number of contracts exchanged by all traders across the entire market equaled the Cohan’s “suspicious trade.”
Leaving aside the fact that it’s totally ludicrous to assign almost all the volume in a 10-minute period to one group of people with inside information, just because trades took place as confirmed volume doesn’t mean we can tell if they were new or old positions, buyers looking to get long, or sellers looking to get short. In fact, they were almost certainly a wide range of those sorts of positions, spread across the extremely diverse group of traders and institutions that operate in futures markets.
Cohan cites September 3 as an example of a big buy going through near the end of the day, which later turned profitable for the buyer thanks to Trump headlines.
Since all trades must by definition have a buyer and seller, the claim is in part tautological, but if a buyer is suddenly making huge, suspicious trades, you’d expect the overall market price to rise on volume, while a seller would do the reverse.
The problem is, as shown in the chart below, the rise in volume toward the close led to falling, not rising, prices, suggesting sellers were the ones moving volumes, not buyers. While prices did tick up fractionally during an explosion of volume right at the 4 o’clock close for cash equity markets, the move would have to have been far larger if those flows were not very well balanced between traders trying to buy and traders trying to sell.
There is nothing unusual about big volumes late in the day, regardless of what comes next.
In the chart below, we show the volume for futures contracts traded between 3:50 and 4:05, a period when Cohan alleges the fishy trades happened on September 13, as a share of total futures contracts traded that day. As shown, the volume at that part of the day wasn’t unusual. Futures (and other markets) very often see big volumes into the close, especially if it’s already been a high-volume day.
The Vanity Fair piece also cites June 28 for big, end-of-day volumes followed by a news event as evidence of malfeasance.
A trade that accounted for “some 40% of the day’s trading volume in September e-minis” is specifically called out but there was no single trade for 420,000 contracts in that period that the author claims.
Instead, we see volumes of about 334,000 contracts in the September e-mini in the half hour between 3:30 and 4. That surge in volume, while large, is normal for the last trading day of a quarter.
Thanks to regulatory requirements and reporting period cutoffs, the last day of trading for the quarter (ending March, June, September, and December) is always going to be strange.
Exposures get moved around quickly, liquidity can disappear, and lots of business needs to get done. As a result, it’s not unusual to see millions of contracts traded in the e-mini contract nearest to maturity.
It’s also typical for many of these trades to get done at the very end of the day. In both March and June of last year, about 14% of quarter-end volume took place in the last half hour before the cash equity market closed. That’s drastically less than the 40% claimed by Cohan, and even so September’s month end saw 24% of e-mini volume in the last half hour, much more “unusual” than June.
All the claims made in Cohan’s reporting sound damning. But given the proper context, numbers that are eyebrow-raising presented in isolation are in fact business as usual in busy futures markets constantly buffeted by new information and trading strategies.
Playing to people’s assumptions
The financial world is sometimes simple, but when generalists without subject-matter expertise dive into it, they can get over their skis quickly. The viral Vanity Fair piece is a clear example of that.
Sensationalizing and veiled suggestions of wrongdoing that appeal to what readers want to hear is a great way to grab eyeballs, but it’s a horrible way to explain how the financial world works.
Even people who know better sometimes get caught up in the excitement. MSNBC host Stephanie Ruhle used to be a credit-derivatives saleswoman at multiple Wall Street firms, and that market sometimes uses the types of futures Cohan cites as a way to hedge exposure. Based on Ruhle’s experience it would seem like she should know better, but the claims made in Cohan’s piece were so dramatic that she tweeted out the piece.
All the claims made in the Vanity Fair article are easily debunked with a little bit of knowledge about how futures markets work and access to basic financial-markets software.
Ironically, that sort of easily debunkable claim that makes an emotional appeal to those hearing it is a trademark of the president’s communication style, not a well-reasoned and grounded-in-reality view of the world that would come from an informed commentator.
Wrongdoing by the Trump administration and its hangers-on has resulted in jail terms and an impeachment inquiry by the House. Sensationalized and uninformed commentary doesn’t help matters and in fact makes everything worse, contributing to the system of baseless ranting and invented reality that so many who oppose the president seem to abhor.
Special thanks to Kid Dynamite.
George Pearkes is the global macro strategist for Bespoke Investment Group. He covers markets and economies around the world and across assets, relying on economic data and models, policy analysis, and behavioral factors to guide asset allocation, idea generation, and analytical background for individual investors and large institutions.