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Rogue trader, Revelations from LeMonde page 1
- Thread starter momoNY
- Start date
Quote from nonam:
How to screw up world stockmarkets: The management of Societe Generale SA, France's second-largest bank, appears dumber by the day. Not only did they not find their trader -- he'd been at it since 2005 -- not only did they not find bets totaling more than the bank's entire worth, but they panicked like the dumbest of dumb investors. They handed all Kerviel's positions to one trader who unwound all the positions in one day of massive selling. As word got around about the massive unwinding, everyone and his uncle stepped back and let the idiot sell at what became distress prices, thereby tripling Kerviel's paper losses and exposing Societe Generale's management for the idiots they were.:eek:
To be fair, with that size position, it doesn't matter if you are maximum bullish, you must still unwind it until it is at more normal levels. It is completely unacceptable to risk bankruptcy under any conditions.
They should have said "are we maximum bullish? If so, and we were flat, what size position would we have put on?" Let's say that was a 5 billion position (pretty big). Well, that's the position they should have. But they found themselves long 50 billion. So they have to unwind 45 billion just for risk control, no matter how bullish they are.
To not unwind, would be equivalent to going from flat to long 50 billion on that Monday - a totally insane level of risk.
So if they traded well they would have lost like 4.5 bill instead of 5.5.
Quote from dont:
It was three days, but basically you are exactly right. They should be hung drawn and quartered for the fools they are.
So you think they should just have bet the entire company and carried a 50 billion position in equities? What if the fed had not done their cut, and the market had crashed another 20%? They would have had a margin call and be forced to sell into an even more panicky market at much lower prices. The bank would be wiped out.
The trader who was assigned the position did the right thing. In that situation, survival is the number 1 priority. He liquidated a gigantic position and only moved the market down about 5% (and not all that was his selling - Asia and the overnight S&P cratered too). That's not too bad.
Quote from Cutten:
So you think they should just have bet the entire company and carried a 50 billion position in equities?
Firstly they should have know what their position was when was the last time you had a position you did not know about?
Secondly I think they could have closed it out a lot more efficiently than, lets just sell it as they appeared to do.
For my little odd lots sure when I make a mistake I can just go the other way, my biggest cost is comm and the market movement, but the biggest cost for large large traders is market impact!