How A 28 Year Old Ex-Goldman Trader, Who Accounted For Up To 20% Of E-Mini Volume, Blew Up
As previously reported, former Goldman prop trader and MIT-grad Matt Taylor, 34, handed himself over to authorities earlier today and subsequently pled guilty in Federal Court to one charge of wire fraud "saying he exceeded internal risk limits and lied to supervisors to cover up his activities." He subsequently posted bail in the amount of a $750,000 bond with two co-signers. His sentencing hearing is set for July 26, when he faces a prison sentence between 33 months and 41 months and a fine of $7,500 to $75,000. He will likely get the lower end of both wristslaps, and come out from minimum security prison, that is assuming he even spends one day inside, to some cash stashed away in an offshore bank account (not Cyptus) courtesy of his many years manipulating massing the market first at Goldman and then at Morgan Stanley. And manipulating massing he did, because courtesy of Reuters we now know the full details of his transgressions.
First: his motivation:
In court, Taylor said he covertly built the position in an effort to restore his reputation and increase his bonus. He earned a $150,000 salary and expected a bonus of $1.6 million, according to court documents.
Taylor, who is now 34, was thus was a paltry 28 at the time when he was expecting nearly $2 million in all in comp. For what? Why being one of the designated few responsible for the daily inexplicable swings and stop hunts that the irrational market is so well known for.
Taylor, who joined Goldman in 2005, worked in a 10-person group called the Capital Structure Franchise Trading (CSFT), and was responsible for equity derivatives trades.
After his trading profits plunged in late 2007, his supervisors told Taylor his bonus was going to be cut and instructed him to reduce risk-taking, the charging documents said.
Instead, he "amassed a position that far exceeded all trading and risk limits set by Goldman Sachs, not only for individual traders ... but for the entire CSFT desk," according to charging documents.
This is pretty much exactly what JPMorgan's Bruno Iksil was doing when the massive Whale Trader's portfolio starting going against him, first due to the market, and then when news leaked of his positions, as various vulture funds start going against his maximum pain positions: he doubled down, then doubled down again, then doubled down some more with the knowledge that if anything bad were to happen he has a massive balance sheet behind him on which to fall back on and double down again. Sadly, an infinite Martingale strategy where one can always double down (with taxpayer funds) to offset prior losses is a luxury few outside of the sanctified walls of Wall Street trading floor are exposed to.
How big did Taylor's position become?
A person familiar with Goldman's equities trading business said Taylor's trading position was significant - representing roughly 20 percent of e-mini trading volume the day it was established. The market moved against Taylor's position, leading to the loss, said the person, who declined to be named.
For perspective, the $8.3 billion position Taylor took in the e-mini futures market was twice the size of the $4.1 billion trade the U.S. Securities and Exchange Commission highlighted in a report on the causes of the May 6, 2010, "flash crash" in which a series of e-mini trades caused the Dow Jones Industrial Average to plunge 700 points in a matter of minutes.
All this happened on the days of December 12 and 13, 2007.
Ignoring for a second the absolutely idiotic statement from Goldman that the world's most sophisticated hedge fund, with the strictest of risk controls, had no idea what the 28 year old trader (seemingly completely unsupervised) was doing, what Taylor basically did was that he ended up accumulating nearly one fifth of the most levered, market-moving derivative security - the E-Mini futures contract - in an attempt to do what JPM also did: have enough scale to be able to corner the market at will, and bend it to his demands.
It didn't work, and the rest is history.
Because while Taylor was making money, everyone loved him and he was expecting millions in bonuses fresh out of college. The second it failed, however, Goldman had no choice but to throw him at the wolves. Or Morgan Stanley as the case may be, where he somehow ended up working for the next four years without anyone asking questions. One wonders how many multi-billion ES positions Matt built up in the period 2008-2012, allowing him to bend the market at will, only this time without getting caught? We will never know: simply because Margin Stanley is such a more reputable firm, it would naturally never allow this kind of full tilt trading, and would certainly supervise all of its traders, even those whom it fired for "unrelated" reasons a few months before the CFTC launched its suit (hired previously despite Goldman adding on his U-5 that he took "inappropriately large proprietary futures positions in a firm trading account" - perhaps it actually boosted his comp?).
Of course, the only question remaining is what in the market caused Taylor's trade to finally throw in the towel, and force cover his position, i.e., blow up, when the margin demanded against him was just too much, and sent ripples across Goldman's trading floor. We will let readers find the point of maximum pain on the chart below, which shows the ES trading pattern on December 12-13, 2007 (yes, the market was only going up, up, up back then too).
Take home lesson: it appears that that 50 point ES mega-swing from hi to low in a matter of hours was enough to stop out even a Goldmanite with an $8.3 billion gross notional ES position.
A copy of Matt Taylor's FINRA brokercheck report can be found here.