Bank of Montreal Yet to Come Clean

There is a shared need between delicate clothes and delicate investments.  They both require special handling.  

When it comes time to wash a sweater labeled “Dry Clean Only” the right thing to do is take it to a dry cleaner rather than a laundromat.  The dry cleaner will use a chemical solvent called perchloroethylene on your sweater rather than water.

If you’re a bachelor who recently moved out of your parent’s home, you might be forgiven for not understanding the difference between these two methods.  Some leeway might even be granted initially to a bachelor who understands the difference *in theory*, but through a combination of inexperience and a need to be thrifty, runs some dry-clean-only clothes through a laundromat and is subsequently surprised and angry at the results.  Even the most forgiving cleaners however would have little patience for a fashion designer of exotic materials who made the same mistake.

And here is where I bring this analogy back to the Bank of Montreal and their trading of exotic out-of-the-money natural gas derivatives. With more than 20 years of experience in this type of trading, and the scars of a few significant blow-ups marring their track record, the Bank was fully aware of the difference between the inexpensive (and often free) "water based" service a brokerage firm such as Optionable could provide as opposed to the "chemical based" service a Financial Information Services firm such as Markit could provide.  [to keep the analogy clear, brokerage based services that test quotes by placing live orders to trade at the price points being tested, those firms I'm calling: 'laundromats'.  Firms that call up and interview traders about where they think the market is going, firms that are researchers rather than brokers, I'm calling 'dry cleaners'.] 

Better yet, in their own words, here’s the difference:

Markit’sTotem
Optionable’s Real Marks

To an inexperienced trader, these services may seem similar.  Yet to the trained eyes of experienced Market Risk professionals working at a large multinational bank, the different is as straight forward as knowing that laundromats use water and dry cleaners use chemicals. 

I was in the courtroom when Federal Judge George Daniels asked in what I sensed was genuine frustration and a sincere desire to understand, Why didn't Optionable just do the reports the way the Bank wanted?  Why did they do it some other way?  Given the luxury of hindsight and from the safety of my private home several years later, I can only wish that someone on the Defense team had presented the Judge with my Dry Cleaner vs. Laundromat analogy.  I wish the Judge knew that Optionable performed the tests in exactly the manner they told the Bank they would - which was also the only way as a brokerage firm they were capable. There were other firms that offered 'dry cleaning' and the Bank's own records show that Optionable's Kevin Cassidy suggested that the Bank use them in addition to the services his company could provide. 

In short, the Bank of Montreal accused Optionable of fraud for operating a laundromat when the Bank wanted a dry cleaner.  The notion that it would have been "just as easy" for Optionable to be a dry cleaner when they were clearly a laundromat is both misinformed and unfair.  (and the notion that Optionable presented itself as a dry cleaner is slanderous) Despite employing seasoned professionals who were highly knowledgeable of the difference between these two services, the Bank still got away with blaming Optionable for this discrepancy, as if the Bank was an awkward bachelor who put his girlfriend’s favorite sweater through a coin-op washer and dryer and then couldn't face her with the truth about what he had done. It is my opinion that the Bank’s fraudulent behavior caused other traders in the market to lose faith in Optionable's trustworthiness and hence Optionable has been unable to generate revenue as a brokerage firm since 2007. 

Disclosure:  I am an investor in Optionable.  This blog does not offer advice on buying or selling any security. No actual sweaters were harmed in the production of this blog post. (click here to see my photo source)