Re: Dirty Laundry...

I'm perfectly willing to do a "live" demonstration of money laundering
using the futures markets. In your last private letter, you suggested
that we use real money. I see no reason to do for two reasons:

1) Commission costs and other fees are prohibitive for the small
amount of money that I have. Plus, why would I want to spend all that
money just to prove a point to you?

2) I see no reason to go out and borrow money for what is essentially
an academic exercise. This is a game for the rich. If you've only got
to move $10,000 then cash and Fed Ex is fine.

So you are welcome to add all of the margin requirements and stuff and
we'll work it out on paper. (I'll even sweat a bit for real, if you
want.) Make out a list of the transaction costs and margin
requirements and I'll come up with a target sum to transfer. Then we
can figure out the risk strategy to pursue.

The only problems I can see in doing this well is finding a source of
futures prices. I don't have a live feed and I don't have the time in
my day to sit on a terminal waiting for the right moment.(I've wasted
enough on this argument.) Closing prices are okay, but they are not as
efficient as using all of the noise in the market during the day.

Oh, I wanted to point out one other fact about swapping tickets: It's
illegal. But it is not clear that it is illegal to just place bets
on both sides of the market.

Peter Wayner says:
> I'm perfectly willing to do a "live" demonstration of money laundering
> using the futures markets. In your last private letter, you suggested
> that we use real money. I see no reason to do for two reasons:
> 
> 1) Commission costs and other fees are prohibitive for the small
> amount of money that I have. Plus, why would I want to spend all that
> money just to prove a point to you?

Several hours ago I offered in private mail to conduct a bet with you
in a jurisdiction that permits such bets -- I suggested that $10,000
might make it worth your while.

> 2) I see no reason to go out and borrow money for what is essentially
> an academic exercise. This is a game for the rich. If you've only got
> to move $10,000 then cash and Fed Ex is fine.

Well, the return on the bet would be quite handsome -- IF YOU ARE
RIGHT. (I believe one can make such bets in England -- anyone know for
sure?) Given that laundering, say, $50,000 successfully would cost
almost nothing other than interest costs IF YOU ARE RIGHT, the return
of $10,000 on your interest costs IF YOU ARE RIGHT would be extremely
nice -- on the order of thousands of percent. IF YOU ARE RIGHT, of
course.

> The only problems I can see in doing this well is finding a source of
> futures prices.

I assure you that will be the least of your problems. You can get
prices all day long from most brokers, and if you knew anything at all
about the futures market (you must, since you've said so much about it
thus far) you'd know that you can set orders with your broker to be
triggered off by a particular price being crossed. You needn't watch
the market all day long.

> Oh, I wanted to point out one other fact about swapping tickets: It's
> illegal. But it is not clear that it is illegal to just place bets
> on both sides of the market. 

Thats fine, but you can't successfully launder money using your
technique so its not suprising that its legal.

Perry

> Peter Wayner says:
>> I'm perfectly willing to do a "live" demonstration of money laundering
>> using the futures markets. In your last private letter, you suggested
>> that we use real money. I see no reason to do for two reasons:
>> 
>> 1) Commission costs and other fees are prohibitive for the small
>> amount of money that I have. Plus, why would I want to spend all that
>> money just to prove a point to you?

> Several hours ago I offered in private mail to conduct a bet with you
> in a jurisdiction that permits such bets -- I suggested that $10,000
> might make it worth your while.

>> 2) I see no reason to go out and borrow money for what is essentially
>> an academic exercise. This is a game for the rich. If you've only got
>> to move $10,000 then cash and Fed Ex is fine.

> Well, the return on the bet would be quite handsome -- IF YOU ARE
> RIGHT. (I believe one can make such bets in England -- anyone know for
> sure?) Given that laundering, say, $50,000 successfully would cost
> almost nothing other than interest costs IF YOU ARE RIGHT, the return
> of $10,000 on your interest costs IF YOU ARE RIGHT would be extremely
> nice -- on the order of thousands of percent. IF YOU ARE RIGHT, of
> course.

This system can be tested with a small amount of capital.

Only two contracts will be in play at any time.  So, you need only put
up margin for two contracts.  This is feasible for less than $10,000.
When cash moves the wrong way, it can be funnelled back to the right
broker.  At the end of the game, we can review the brokerage
statements to see if the money ended up where it was supposed to.

Those who doubt Mr. Metzger's analysis should be able to find backers
who will supply this small amount of working capital.  I would guess
that Mr. Metzger would be willing to allow his critics to pool their
resources, should some turn coward or plead poverty.

Peter

> Oh, I wanted to point out one other fact about swapping tickets: It's
> illegal. But it is not clear that it is illegal to just place bets
> on both sides of the market. 
 
Yes, it is prohibitted to be both long and short the same
contract at the same time.  It creates a false open-interest
position.

(i.e.  It presents an illusion to the market that a position is
open when in point of fact it is a "scam" transaction, it is
misleading to participants in the marketplace.)

As to the idea of swapping tickets, it ignores normal audit
procedure.

Trading procedure is as follows:

(With thanks to Bruce M. Collins, V.P. Equity Arbitrage Group,
Index Products Research, Shearson Lehman Hutton Inc. and James A.
Schmidt, V.P. Equity Arbitrage Group, Shearson Lehman Hutton
Inc.)

A customer decides to hedge a position.  The trader phones
directly to the floor of the appropriate exchange and places the
order with a floor broker.  The floor broker executes the order
on the floor, and phones a report back to the trader, where the
order ticket is written and the customer account number is
reported to the floor.  The wire operator books the trade to the
customer's account and sends a hard copy confirm to the firm's
branch where the customer is located.

On a nightly basis, the operation area of the brokerage firm will
match all trade tickets to the hard copy confirms to verify the
contract.  The buy/sell, price, quantity, account number,
open/close will all be checked for accuracy and commissions
calculated for each ticket.  In addition, operations will send
details of the all the trades to the Clearing Corporation which
then matches buy and sell orders across brokerage house
inventories, and in the event of discrepancies adjusts contracts
and dollars where necessary.

Prior to sending the customer a confirm, a trading desk clerk
will match trade tickets and reports with the hard copy customer
confirms to verify the account.  On properly matched trades the
confirm is sent to the customer.  If a correction is necessary,
the clerk will adjust the trade and again verify all trade
information on the confirms the next morning.

Finally, the firm's margin department will settle all contracts.
A check is issued on a sell to the customer, or on a buy the
customer will deliver an escrow receipt from his bank.  In
addition, the margin department will assign operating
requirements for any opening short positions and issue and margin
call that may be necessary for new or existing positions.
(This is performed on a nightly basis.)

So, in short, yes a broker can swap tickets, however it does
leave a full audit trail.  Swapped tickets provide no anonymity.
In this regard, the problem is the same as that of remailers.  

There are additional issues as well, money laundering usually
involves laundering cash.  Firms will not routinely accept cash
deposits for margin.  Funds must be on deposit, and freely
available in order for the firm to settle it's daily accounts.