There are many legends about the Wall Street stock market crash in 1929, but the most vivid image is the long and faceless queues of the unfortunate ordinary traders going to to jump out of the windows of the ravaged companies and hedge funds. Since then, much water has flowed under the bridge - the crises continued to appear cyclically, the exchange orders changed in some ways, and trading operations moved to the Internet. But from time to time something still forced the market participants to lose multibillion corporate assets, fall out of windows and go to jail. What exactly is it and how does it work?
Response of the lucky Nick who lost $ 1.3 billion on the Nikkei index
Nick Leeson is one of the most famous stock exchange outsiders who even named his book Rogue Trader. In the early nineties, he was the rising star of speculative trading. And thanks to amazing luck, which he himself later admitted, at 28 he already took control of the operations of one of the largest and oldest trading banks in the world on the Singapore International Currency Exchange - Barings Bank.
But soon Lady Luck left Nick, and the losses grew so much he had to use the privileges of the chief trader to hide them on a secret trading account under the number 88888. The climax of trade losses occurred in 1995, when Nick once again bet on the growth of the Japanese Nikkei, expecting the coolest overnight rally for Japanese exporters. But an unexpected earthquake in Kobe sent the index rushing down, and our hero followed. The positions opened later with an eye to the rapid recovery of the market exacerbated the situation significantly.
But the recovery never came, the forecasts were wrong, and Nick lost about $1.3 billion of corporate funds, which led Barings Bank that survived more than two centuries in the industry, but not Lucky Nick - to bankruptcy. The rising star got 6.5 years in jail but was released on parole after he was diagnosed with cancer.
Response of the lucky Mr. Copper who lost $2.5 billion
Yasuo Hamanaka, now better known as Mr. Copper, traded for Sumitomo Corporation - one of the largest Japanese keiretsu – a conglomerate of financial, automotive, and metallurgical companies. Hamanaka specialized in copper. It was rumored that he personally controlled 5% of the world copper market, but failed in an attempt to drive it into a corner. In 1996, Sumitomo Corp. was reported to have suffered losses of $2.6 billion on copper trading.
Due to the conviction and imprisonment for eight years, Mr. Copper raised many questions and suspicions as to whether he was a corporate saboteur or a price conspirator. The convictions were based on the fact that he had forged the signature of his boss in a business letter. But the degree to which he is a fraud is still a topic for lengthy discussions and individual investigations.
Response of the lucky Brian Hunter, analyst of the hedge fund Amaranth, lost $7 billion
Traders of hedge funds have earned a special popularity in the field of catastrophic losses, but Brian Hunter was much more inventive than all the rest.
His flirtations with futures for natural gas were initially extremely successful. And especially when Hurricane Katrina smashed the infrastructure of New Orleans. Huge profits attracted more and more investors to the fund, providing Hunter with more funds for trading.
But unfortunately, Hunter's ability to predict the weather turned out to be no more consistent and exceptional than that of television weather forecasters, and once, natural gas turned away from him. In just one day, on September 14, 2006, Hunter and his colleagues lost $560 million. But the market is not a place for hopes and, trying to regain the loss, during the subsequent trading week the trader lost 6.5 billion, which led to the closure of the hedge fund.
Kweku Adoboli from UBS, £1.4 billion
The most striking event in recent years was the investigation of British trader Kweku Adoboli who cost the Swiss bank UBS 1.4 billion pounds sterling.
Last year, in his BBC interview, Adoboli, like no other trader in a similar situation, towered over the accusations. Kweku insists that the pressure of the banking sector has become so intense that it is very difficult for other traders to refrain from the temptation to follow his own example. With regard to the fact that he is the largest trader ever deported from Britain, but described in the lawsuit as the chief con man, Adoboli refers to this characteristic as an unjust prejudice. He himself states that the structure of the industry implies situations where entrepreneurs actually require traders to take an increasing risk - to get more and more profit. And in his case, the consequences of such claims led to the conviction for two cases of fraud and seven years' imprisonment.
Kweku has made a lot of secret deals about which, he says, the senior management of the bank was aware of and never complained until these transactions led to significant losses and endangered UBS as a whole. Taking full responsibility for the transactions, the trader still insists that, from the point of view of professional ethics, the banks still haven’t learned the lessons of the financial crisis, where the big bosses stay out of prison, while the blame for the industry practice is put on smaller employees who are referred to as swindlers and conspirators.
What has led these people to losses?
- Excessive self-confidence, greed, fear, weak analytical background, unfitting (ir)rationality
- Grail ambitions familiar to almost every trader and giving rise to groundless hopes for the invention of universal and highly profitable trading strategies
- And of course other people - employees - who not only can, but also want to live at the expense of such "scapegoats"
In other words, if you are interested in the career of an institutional trader, prepare to take on the risks of others - more senior colleagues. They will not care about the career and freedom of ordinary employees in the face of alluring prospects of high profits, and with silent consent allow ordinary traders to negotiate decent prison terms, indirectly forcing them to do high-profit and high-risk transactions.
For private traders, the situation is not so bad. Here we are dealing only with our ownstrategy and emotions. But one should not pursue good averaging strategies in the hope of moderate profit with moderate risks. Hopes have no place in the markets, and such approaches often do not provide for ways to retreat in the case of unexpected losses. However, aggressive and conservative approaches can more confidently justify themselves at the right time and in the right markets. Therefore, it is best to select the necessary strategies based on the incoming data. After all, "there is nothing more disastrous than a rational investment policy in our irrational world," says old Kaynes.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.