The BBY Fiasco – Shame on you ASX!

I think its time for a rant. Some of you may be familiar with the fact that one of Australia’s biggest Brokers, BBY,  has just gone into voluntary receivership.  For us who are not corporate lawyers that basically means they have gone bust. Big deal one may say, companies go bust all the time, so there is another one gone, free enterprise doing its job. Ok, fair enough, but let’s see what happened here.

Play

Everybody now acts completely surprised and is wondering how that could all happen. As far as I am concerned, the writing was on the wall. For me BBY started behaving weirdly towards the end of last year. Let me give you an example. I think it was in November last year, it was the Monday before the expiry of XJO options (they expire on the open on Thursday morning), and I notice that a naked put leg of mine had been closed down, without my consent. It was no major drama the cost was negligible, the contracts were if I recall correctly 3 or 4 cents each, that alone shows you how far away from the money they were.

Was I in default? No! Did I breach any other regulation? No. Was there a margin call? Nope.

My broker tells me that BBY (my broker cleared through BBY) had demanded that I close those positions. Three days before expiry, several hundred points away from the market. They supposedly had calculated my margin requirements on a 15% drop and came up with an outrageous number (a few hundred thousand Dollars) of margin. So they decided that he best way of counteracting that was to close those few contracts that would expire in about 12 trading hours. Go figure!

So I argued a bit but I notice quickly that I was barking up the wrong tree. My broker agreed to cover the cost for that closed leg, which I appreciated, but it still left a bitter taste in my mouth. Someone else fiddled with my positions – that just simply made me angry. Trading and positions I hold are, as many of you traders will understand, a very emotional thing.

Unfortunately that was the beginning of the end of my long-standing relationship with that broker firm. The incidents in which I was not allowed to trade the positions I wanted to trade increased over the next weeks, the so-called “margin requirements” imposed by BBY (so my broker told me) were onerous in my eyes, did not follow any sort of logic or consistency and in summary made it impossible for me to trade there. A few nasty words in writing to me by one of their staff then sealed it all off, I left and moved that trading account to a different broker.

That broker oddly enough also cleared through BBY, but there were no weird 15% fall margin calculations, there was no “we have to get permissions from BBY before we can put your trades through” and other nonsense along those lines that I was given by my previous broker.

In January 2015 I read in an article in the AFR that BBY had been fined $180,000 for being unable to meet a margin call back in June 2014. The article also mentions that strictly speaking BBY was insolvent and only a special deal with the ASX made it possible for them to keep from having to shut down.

That should have been an alarm bell. Not only for me, but for many others in the industry. Like broker firms clearing through BBY – hint hint.

While I was happily trading through my new broker, a friend of mine, who traded through my old broker firm tells me horror stories about supposedly BBY forcing him to close naked positions on numerous occasions. They had to be closed, no rolling down, no rolling out in time, no buying protection below (for puts), nothing – they needed to be closed. There was no arguing, there was no logical reasons given, they had to be closed – at considerable losses (tens of thousands of Dollars) to my friend by the way. Looking at his overall positions, closing down some of his short put legs was the worst thing to do.

On Friday 8 May at night (so about two weeks ago), my friend calls me up and says that he had heard rumours that BBY had been shut down. On Monday I get an email from my broker saying that “BBY has run into some liquidity issues” and that they were shutting down their options clearing business.

One day later I get an update basically telling me to not worry, my broker was negotiating a deal with a different clearer. Things from there just deteriorated. I was seriously considering transferring my positions to yet another broker I have dealings with (not clearing through BBY), but I did not (mistake as it turns out).

Wednesday 12 June I get an email from Mr Glenn Rosewall, the executive chairman of BBY. He says that their options arm will stop operating and that I will need to take action to transfer my positions. I have time until 1 June, so he says, at which time my positions will be closed. Mr Rosewall’s email footer states proudly: “Best Investment Firm, Best Equity Capital Markets Firm and Best Equities Research House in the 2013, East Coles Independent Investment Bank Survey and Ranked #1 in Options by market share in Australia”.

As Alanis Morissette would say – wasn’t that footer ironic?

One day later, on Thursday I am told by my broker that I can no longer enter any new positions but that I could close existing ones. And over the next two days that is exactly what I did, I slowly ease out of some positions.

Mr Rosewall also in an article in the AFR  says in a statement that BBY’s exit from the options clearing business had come about as a result of the business experiencing “strong growth”. He added the move would not affect the firm’s other businesses.

Yeah right! That was just plain and simply a lie and I hope he will pay dearly for that. One week after that statement, the firm was put into receivership.

And here come the worst bit, all BBY clients could no longer trade at all. Not even close out open options contracts. Nothing, a complete trading halt imposed by, wait for it, the ASX. On that very Monday, the Australian market dropped just over 70 points – quite unpleasant if you have open positions like me and you cannot adjust – in the week of options expiry for the XJO!

What happens if a BBY Options client gets exercised – that trader cannot even buy (or sell) the stock to cover that exercised contract. What about the trader exercising his or her option? There is no way for the option seller to fulfill the obligations under the contract. And none of that is the trader’s fault. What happens if the market keeps moving (as it kind of tends to do on a daily basis …) and a sold option position suddenly goes into the money? There is no way to take any sort of countermeasure, all you ca do is sit and wait for your money to disappear.  The traders that are now shut out did not make any mistakes, they did not break any rules, yet they are shut out from trading causing huge added risk to the already risky trading business.

As of today, nobody suddenly has any answers. My broker is frantically trying to move my and his other client’s positions to a new clearing house but cannot give me a date on when I can finally adjust my positions again. I called the ASX, they refer me to their website which does not give me the answers I am after. I am supposed to call the administrator for any other questions.

Someone screwed up and lied. Yes, I am talking to you, BBY. Someone has no idea what options are and what a selective trading halt means to traders. Yes, I am talking to you, ASX. Or, what would be even worse, you know what it all means but you decided to not give a damn.

Maybe I have a blue-eyed view of how this all works, but isn’t the ASX supposed to make sure that some rogue trader or lying CEO cannot lose their client’s money? It sure looks to me right now that the ASX is right now causing me to take incredible risks through not allowing me to trade. I would never voluntarily take the kind of risk I am now forced to take through the inability to manipulate my open positions. Risks that can very easily turn out to be a nasty nasty loss.

On every trade I make, the ASX takes a cut – and I thought that money was sort of an insurance. An insurance against stuff like that happening. Instead what I get is the moment there is an issue, the ASX runs and hides behind corporate nonsense, a web site and an administrator. Shame on you, ASX!

Who the heck is in charge of making decisions like those over the past few days?

You might also like

Franklin Sanders “How I beat the US Government”

Franklin Sanders, the Moneychanger, is back on the show telling me all about the lawsuits he went through when he was sued by the US Federal Government, the State of

Training Video #3 – What’s the difference between call and put options?

Call and Put options explained: Here is Part 3 of the training video series, all about the difference between call and put options. While call options are all about the

Case Sosnoff – Where do I start? The coming about of a young trader

Case Sosnoff chats to me about her life growing up surrounded by traders, how she came to being taught options trading on a public TV show by one of the

0 Comments

No Comments Yet!

You can be first to comment this post!