Vanity Fair published an explosive story on Wednesday night claiming that unknown futures traders have made billions of dollars ahead of Donald Trump's statements. Anyone who hates Trump would love to love this story, which helps explain why people who should know better praise it.
The story is bullshit. (It was shit for the first time too, but people seem to be more attentive this time.)
Let's start with the headline: "There's definitely Hanky-Panky going on": The fantastically profitable mystery of Trump Chaos Trades. "
The quote in the headline comes from an anonymous "longtime CME trader" who also believes in the long-held conspiracy theory that al-Qaeda "paid in" by the front-run September 11 attacks – that is, trading with the knowledge of an upcoming events – in international futures markets. The headline claims that there is "Trump chaos trading", which means traders make money by driving market chaos in the wake of Trump statements, but the story provides no evidence that any such Trump chaos trade really exists. When it comes to "fantastically profitable", there is no evidence at all that anyone made any money here, let alone billions of dollars.
The article follows a simple MO: It constantly sees how the market moved in the wake of a surprising Trump announcement or decision, and then finds the biggest trade made the previous day in the futures market. The author of the article, William Cohan, then suggests, without evidence, that the trade was conducted with knowledge of the upcoming Trump statement.
In Cohan's opening anecdote, for example, "someone" shortened 120,000 e-mini futures on September 13 of this year. That story is followed by another where "someone" bought 82,000 futures on September 10. September 13, the trade took place before drones bombed Saudi oil infrastructure (something that Trump almost certainly did not know would happen); the other took place before the Chinese government announced that it was levying certain duties on US goods. (Again, it's not clear that Trump knew the Chinese announcement was coming.)
Why does Cohan characterize the first deal as someone who goes short and the second as someone who goes long? Just because the market fell after the first trade and rose after the second. In reality, he could have just as easily characterized the two trades in other ways – "someone" who loses $ 180 million in the wake of September 13 and "someone" other who lost $ 190 million after September 10. trading involves both a buyer and a seller.
In addition, Cohan has no idea how long the positions had been. To make money, buying before a particular event is not enough – you also have to hold onto the position by the event happening, wait for the market to move in your favor and then sell after the market has moved. Cohan gives no evidence of any of these transactions being discontinued or whether they were discontinued with profit or loss.
Cohan also has no idea what other business traders were doing at that time. Futures trading is often designed to secure or offset positions in other markets. A gain in a futures position often only reduces losses elsewhere.
Cohan does not even make a simple check to see if trading of this size is unusual, on a normal day. (Spoiler: They are not.)
To provide evidence of insider trading, you need two important ingredients. You have to show that someone made a profit and you have to show that they had internal information. In this case, Cohan does not provide any of them. He is basically p-hacking: He says that about the people who did these deals had been insider trading, then they would have been insider trading. Which doesn't really get us very far.
Cohan also tends to ignore the clearer explanations of what is happening. The biggest trade he talks about took place "during the last 30 minutes of trading on June 28" – which also happens to be the end of the second quarter. Big deals always happen at the end of the quarter; it would be more surprising if was not there was any big trade around then.
When Cohan talks about "the precision and timing of these deals and the huge sum of money as a result of them", he has no idea what he is talking about. You cannot find "precision" when you only know part of a trade and you do not know when or how it was dissolved. And you really can't know how much money was made as a result.
So while it may reinforce prejudice for people to believe that Trump or anyone close to him has been insider trading, Cohan gives us no real reason to believe it is happening.