The abrupt cancellation of a planned military strike against Iran in June 2019 sparked a flurry of activity not just in diplomatic circles, but also in the futures markets. A surge in trading volume immediately preceding President Trump’s announcement has raised questions about whether someone anticipated the decision and profited from it. The unusual activity, roughly nine times the average volume for that time of day according to data analyzed by Bloomberg, has prompted calls for an investigation into potential insider trading, a concern amplified by the history of similar occurrences and questions surrounding the oversight of financial markets during the Trump administration.
The timing of the trades is what initially caught the attention of market observers. Veteran futures trader Mike Khouw, formerly of Cantor Fitzgerald, described the situation as “smelling like something was off.” He noted the size of the trades – requiring tens of millions of dollars in margin reserves – indicated sophisticated investors were involved, not casual speculators. “You are not dealing with a rube,” Khouw said. “You are not dealing with someone whose other occupation is working at Starbucks.” The possibility that a hedge fund correctly predicted Trump’s decision and positioned itself accordingly – shorting oil and going long on stocks – is a plausible scenario, though algorithmic trading could also have played a role.
A Pattern of Profitable Predictions
This isn’t the first instance of traders seemingly anticipating major geopolitical events. The online prediction market Polymarket saw six accounts profit more than $1 million by correctly wagering the day before the war began that the U.S. Would strike Iran within 48 hours, as reported by The Fresh Yorker. Similarly, another Polymarket account profited by betting on the removal of Venezuelan President Nicolás Maduro in January, a prediction that came to fruition shortly after a U.S. Raid on January 3rd. However, tracing the source of these profits on Polymarket is difficult due to the use of anonymous cryptocurrency accounts.
The trades related to the potential Iran strike, however, occurred on regulated exchanges, theoretically making them easier to investigate. The Commodity Futures Trading Commission (C.F.T.C.) is the agency responsible for enforcing the laws in these markets and possesses the authority to subpoena trading records and identify the individuals behind the trades. “The thing that should be happening is that the C.F.T.C. Should be investigating these trades,” said Barbara Schiffrin, currently with Better Markets, a Washington-based public-interest group.
Questions About the C.F.T.C.’s Focus
As of this writing, the C.F.T.C. Has not publicly confirmed whether an investigation has been launched. The agency’s leadership, however, has drawn criticism. Current Chairman Mike Selig, a 36-year-old lawyer with a background in cryptocurrency, recently announced the creation of an “innovation task force” focused on industries with ties to the Trump family’s business interests. Schiffrin expressed concern that the C.F.T.C. Is prioritizing the promotion of cryptocurrency, prediction markets, and artificial intelligence over its core function of preventing market manipulation. “The C.F.T.C. Seems to be more focussed on promoting crypto, prediction markets, and A.I. Than its core function: investigating and preventing manipulation in the futures markets,” she stated.
The potential for abuse is particularly concerning given the sensitive nature of the information surrounding the planned strike. The circle of individuals with advance knowledge of Trump’s decision would likely have been relatively slight, increasing the likelihood that any illicit trading was based on non-public information. Identifying those individuals, however, requires a thorough investigation and a willingness to pursue leads, even those that may be politically sensitive.
Understanding Futures Trading and Margin
To understand the potential scale of profits, it’s important to understand how futures trading works. Unlike buying stocks, futures contracts allow investors to bet on the future price of an asset, such as oil or stocks, without owning the underlying asset itself. Trades are typically placed on margin, meaning investors only necessitate to put up a fraction of the total contract value. This leverage can amplify both profits and losses. The large margin reserves required for the trades observed before Trump’s announcement suggest the investors were not simply making small bets, but rather substantial wagers based on a high degree of confidence.
The specific trades in question likely involved shorting oil – betting that its price would fall – and going long on stocks – betting that their price would rise. Trump’s decision to postpone the strike would have been expected to lower oil prices (due to reduced geopolitical risk) and boost stock prices (due to averted conflict). Successfully executing these trades would have resulted in significant profits for those who anticipated the outcome.
The Broader Implications for Market Integrity
The questions surrounding these trades extend beyond the potential profits made by a few individuals. They raise broader concerns about the integrity of the financial markets and the need for robust oversight. If insider trading is allowed to go unchecked, it erodes public trust in the fairness of the system and creates an uneven playing field for investors. A thorough investigation by the C.F.T.C. Is crucial to determine whether any laws were broken and to send a clear message that such behavior will not be tolerated.
The incident also highlights the increasing complexity of financial markets and the challenges faced by regulators in keeping pace with new technologies and trading strategies. Algorithmic trading, for example, can execute trades at speeds that are impossible for human traders to match, making it difficult to detect and prevent manipulative practices. The C.F.T.C. Must adapt to these challenges and invest in the resources and expertise needed to effectively monitor and regulate the markets.
As of November 2023, there have been no public announcements regarding a formal C.F.T.C. Investigation into the trading activity surrounding Trump’s decision to postpone the strike on Iran. The agency is currently focused on implementing new regulations related to digital assets and addressing concerns about market manipulation in the cryptocurrency space. The next key date for the C.F.T.C. Is December 15th, when public comment closes on proposed rules regarding the registration of digital asset derivatives clearing organizations.
This story will be updated as more information becomes available. Share your thoughts and insights in the comments below.
