Actually he didn't make any mistakes at all. He managed to to take advantage of an economic concept called moral hazard. This occurs when you have someone else taking on more of the risk of the downside than you stand to make on the upside. Essentially imagine a bet where you had 50/50 odds but if you won you got $100 and if you lost you lost $50. A rational risk neutral person takes that bet every time. Which in this case takes the form of uncapped profit potential for this trader while the clearing firm eats his risk if he defaults beyond his capitalization. He found a wrinkle in the clearing firm risk management and took advantage of it, which was the rational thing to do. The problem wasn't his risk management, it was the clearing firms.
What risk management mistakes did this top Norway trader make to blow up his account?
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Power markets are tougher than most because they have crazy unforecast volatility spikes that dwarf what you'd see in equities or other commodities. Imagine if the price of gold or AAPL traded in a range of $40-60 for months and then one day traded at $2,200. That's PJM power during the polar vortex. It's a balancing act, and if you want to guarantee the clearing firm never takes a hit you end up with margins so high that no-one can afford to enter the market which itself drives up societal prices potentially far more than an occasional on-time hit.
That said, power markets are insanely complicated and the people running them often have far fewer resources than the people who could exploit them, so it's more common to find edges that are effectively manipulating a poorly written rule or procedure than in equity or listed commodity markets, both imo and as the enforcement record shows.
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That Bloomberg link works free;
looks like he paid way to much tax also- even though he may have had to in Norway??
Nasdaq contingency fund to be used for the first time, meaning bail-in for the members/traders:
https://www.reuters.com/article/us-...ion-after-power-traders-default-idUSKCN1LT28G
https://www.reuters.com/article/us-...ion-after-power-traders-default-idUSKCN1LT28G
Will interactive brokers be affected? This bail-in thing is a risk to all customers. If our broker default because of the cost of bail-in, wouldn't all of us be affected? I am a customer of IBKR.
Not my expertize at all as retail. What it looks like is that members are directly affected. They trade directly, so don't need brokers. Members are hugely institutional and "moderate" amounts for them. There may be some ripple effects and self-regulation, but overall this is chump change in the larger markets. As the energy market are very regulated, shielded and specialized, one would assume some but limited ripple effects. Just my ignorant guess though.
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