"Rogue" traders who made billions...?

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pinetboltz

With the recent news coverage of bubbles/ comparisons to 1987/ VIX-shorting etc, it seems like ppl are expecting a reversal of the strongly trending markets

It seems like in the past, whenever there's a report of rogue traders who lost billions, usually it's some guy who bet on mean reversion using leverage:

Kerviel - going long European stock index futures when mkt was tanking
Leeson - going long Japanese stock index futures when mkt was tanking
Adoboli - (reportedly) long EuroStoxx, DAX, S&P index futures when mkt was tanking
Hamanaka (Mr 5 percent) - long copper futures then mkt tanked
Liu (Chinese govt trader) - short copper futures when mkt short squeezed

The story generally seems to have a few elements:
a) Mean reversion trading
b) Leverage
c) Averaging down repeatedly
d) Strong trending markets with little retracement

& then there's a point where the unrealized drawdown becomes so big the margin is called, story gets into press/bank risk mgrs step in, drawdown gets locked in, etc

How come we haven't heard of "rogue" (cowboy) traders who made billions within 3-6 months by averaging up along trends?

If the rogue trader who averaged down lost 1 billion, then his counterpart who averaged up would have made 1 billion in the same timeframe.

Even with ppl who took the opposite side of the London whale, it looks like the profits were split by a dozen or more funds, not a single entity.

Any stories of guys who did the opposite of the rogue traders who averaged down, by instead averaging up betting on sustained momentum, and made billions?
 
pinetboltz said:
With the recent news coverage of bubbles/ comparisons to 1987/ VIX-shorting etc, it seems like ppl are expecting a reversal of the strongly trending markets

It seems like in the past, whenever there's a report of rogue traders who lost billions, usually it's some guy who bet on mean reversion using leverage:

Kerviel - going long European stock index futures when mkt was tanking
Leeson - going long Japanese stock index futures when mkt was tanking
Adoboli - (reportedly) long EuroStoxx, DAX, S&P index futures when mkt was tanking
Hamanaka (Mr 5 percent) - long copper futures then mkt tanked
Liu (Chinese govt trader) - short copper futures when mkt short squeezed

The story generally seems to have a few elements:
a) Mean reversion trading
b) Leverage
c) Averaging down repeatedly
d) Strong trending markets with little retracement

& then there's a point where the unrealized drawdown becomes so big the margin is called, story gets into press/bank risk mgrs step in, drawdown gets locked in, etc

How come we haven't heard of "rogue" (cowboy) traders who made billions within 3-6 months by averaging up along trends?

If the rogue trader who averaged down lost 1 billion, then his counterpart who averaged up would have made 1 billion in the same timeframe.

Even with ppl who took the opposite side of the London whale, it looks like the profits were split by a dozen or more funds, not a single entity.

Any stories of guys who did the opposite of the rogue traders who averaged down, by instead averaging up betting on sustained momentum, and made billions?
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Some of the Rouge traders actually started out winning big and then losing it all.

I suspect some rouge traders did leap out to a win and then risk control caught up with them and well; publicity, here, might not be desirable for the firm or the trader.

For far less than billions, sometimes crazy traders have taken on more risk than was agreed, then in the heat of it all convinced their superiors to go with this new flow.
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I know a fellow with no credentials who many years ago talked his way into as a trader in a big name Wall Street investment bank, over risked and charmed, made 11 million, got a million dollar bonus, cleared out his desk and walked across the street to perhaps the oldest firm on Wall Street after receiving a million dollar signup bonus and a promissed 50/50 split. He was on his way to sinking the firm by betting it all on an African gold stock (along with presents from the company being traded) when he was fired. Years later the fellow talked Shoenfeld into a personal office with an assistant and cable TV with horse racing coverage- did not end well. Personal wacko friends brought along with support jobs, drugs, drink, strippers, lots of casino trips along the way.
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I traded with a stone losing trader who years ago talked a small firm into backing a small group to pair trade with him as the boss. Needless to say, this fellow added, doubled down and made ok money every month until one fateful week, a "sure thing" pair blew up and woosh... I left shortly before the disaster after making everyone angry by saying "let's be more conservative or this will not end well."
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I think that Rouge traders are often highly manipulative charmers who often end up with more control and buying power than was originally intended.

At some point there can even be people around them who are swayed into enabling or covering.

Many Rouge traders would have done well in pure sales, perhaps even selling ice to Eskimos.
 
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Well, why don't we know of them? Couple of reasons:

1. It is easier to hold onto big losses (and averaging down) and pray for a turnback than correctly time a big win

2. It is possible they are out there, but when discovered, their access is removed. After all, they are rogue. Neither their firm or them want to advertise the unauthorized access.

3. As mentioned, some of these guys started out with wins, but eventually got carried away and lost it all.
 
And probably just a tiny few ended up winning by chance and probably went into politics.... nah I'm just being silly now.
 
Daniel Kahneman won his Nobel prize for his behavioral economics work with Amos Tversky defining Prospect Theory, which generally shows that humans in practice are risk seeking in losses and risk averse in gains. It essentially means that it's basic human nature to double down on losses but not to double up on gains. So to answer your question, it's hardwired behavior.

BTW, if you're at all interested in behavioral economics I can't recommend Kahneman's books enough. He's one of the most brilliant people on the planet but an average 8th grader could read one of his books and pretty much fully get what he's saying. One of those people whose brilliance is simplifying things. And if you're interested in charts, you're interested in behavioral economics even if you haven't quite realized it yet!
 
You will never hear about profitable Rogue traders, they simply will be slapped quietly on the wrist, but handsomely rewarded for the profits they brought in, -- and it's just another day in the office, business goes on,

You only see and hear and read and about things...when the shit hits the fan, o_O -- and it's at the point of no return,
You can't visually hide or cover up the stink of shit. People Have to know,

Good trading, ET extraterrestrials
 
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Sig said:
It essentially means that it's basic human nature to double down on losses but not to double up on gains.
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yea, i guess it's like the gambler's fallacy of betting on black in roulette when red came up 7 times in a row

lawrence-lugar said:
You will never hear about profitable Rogue traders, they simply will be slapped quietly on the wrist, but handsomely rewarded for the profits they brought in, -- and it's just another day in the office, business goes on,
More...

i agree, but to some extent wouldn't the publicly traded banks have to disclose the billions in profits in their financial statements? eg. if there's a extremely large one-off profit from a directional futures position, shouldn't it have been realized because of futures expiration, then reported in the quarterly statements

it was sometime last year there was a WSJ piece about a goldman trader who correctly bet on high yield (i think), but it was $100m-ish, not on scale of billions
 
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