Forex for a trader
Nick leeson forex loss

Nick leeson forex lossHow Did John Rusnak Lose $691M in a Bank Fraud? In 1993, Allfirst Bank hired a currency trader to shift the bank's forex (FX) operations from a merely hedging endeavor to one that would yield profits and boost the bank's bottom line. To this end, Allfirst brought on John Rusnak, who had a decent track record in foreign currency trading at Fidelity and Chemical Bank. Specifically, Rusnak seemed adept at matching options with forward contracts to hedge against risk. John Rusnak was bullish on the yen. He believed the yen had taken all the damage it could following the bursting of the Japanese bubble. Further, Rusnak believed the yen would appreciate consistently against the dollar. Under these conditions, a trader normally would buy forward contracts to get yen for cheaper than market value, while hedging the position with a combination of put and call options. In practice, Rusnak was so bullish on the yen that he neglected to hedge his forward contracts. His luck held, however, until a series of policy changes in Asia culminated in crisis on the Asian market and prompted a long slide in the value of the yen and other Asian currencies. Rusnak Hides His Forex Losses. With his unhedged positions facing losses, Rusnak panicked. He entered false options into the system that made it look like his positions were hedged. While the options kept the bank from discovering the losses, he set about doubling his bets on the rise of the yen. Rusnak convinced his superiors that a prime brokerage account would allow him to wring higher profits from the growing currency operations. Prime brokerage accounts generally are given to hedge funds and high-profile traders with a lot of capital to play with. However, Rusnak was granted the account despite the fact that, unbeknownst to his superiors, he already was working in the red. With his new account, Rusnak increased the size of his trades and kept his losses hidden by using options and a higher level forex contract called a historical rate rollover. This allowed him to hold off realizing his losses, while still betting more on the yen. It also meant that the total value of the forex operations at Allfirst was increasing.

Even though the losses were barely detectable, the increasing amount of capital being tied up in the currency market was obvious. When the bank demanded that Rusnak release some of the capital to ease its balance sheet of the heavy skew toward the forex market, the house of cards came tumbling down. Rusnak's positions revealed a staggering loss of $691 million. Allfirst and its parent bank Allied Irish hoped that Rusnak was party to a grander conspiracy to fleece the bank for profit, but Rusnak had not earned anything above his regular salary and bonuses. Rusnak cooperated with the FBI and revealed how he had been able to maneuver around the bank's loose restrictions. Rusnak's transparency with the FBI hurt Allfirst because it had no one to blame but its own permissive policies. Of course, shareholders took the bank to task over the matter. Allied Irish's stock fell sharply, but it proved more robust than Barings had been after the Nick Leeson scandal. John Rusnak was sentenced to seven and a half years in prison and fined $1 million.

(See also: Trading's 6 Biggest Losers .) This question was answered by Andrew Beattie. Trading's 6 Biggest Losers. Rogue trading makes headlines. In late 2011 an unauthorized trader lost $2 billion for the Swiss-based bank, USB. The idea of a single person losing millions and occasionally billions of dollars is always interesting, but it is even more so when that person is losing other people's money. In this article we will look at six of the rogue traders (in no particular order) who became famous for their very public losses. Nick and the Nikkei - $1.3 Billion Nick Leeson is probably the most famous rogue trader in the world. He even wrote a book on the subject, which was aptly titled "Rogue Trader" (1996). In 1992, he was the stereotypical rising star and his magic touch allowed him to become the head of Barings operations on the Singapore International Monetary Exchange - all at the tender age of 28. But, he soon lost his trading touch and started to rack up a number of large losses. He used his position as both the head trader and the one responsible for settling trades in the office to hide his losses in a secret account, which was numbered 88888. At the beginning of 1995, his trading losses were already significant when he had the enormous misfortune of placing a short straddle on the Nikkei, which was a bet that the market wouldn't make a large move overnight. However, the next day there was an earthquake in Kobe, which sent the Nikkei lower and led to a massive loss In an attempt to recoup these losses, Leeson made large risky bets that the Nikkei would recover quickly form the quake, which it didn't, leading to further losses.

(For related reading, see Are Derivatives Financial "Weapons Of Mass Destruction"? and Hedge Fund Failures Illuminate Leverage Pitfalls .) In the end, Leeson lost an estimated $1.3billion for the bank, which resulted in the bankruptcy of Barings, a bank that had survived for more than two centuries in the industry. Leeson received a six-and-a-half year sentence but was released early for good behavior after being diagnosed with cancer. John Rusnak and the Yen - $691 Million John Rusnak of Allfirst Financial found failure in the Japanese yen. Initially, from when he was hired in 1993 and up until 1995, when the Asian markets were doing well, so did Rusnak. But, Rusnak started gambling and losing progressively larger amounts as the previously friendly markets turned against him in 1996. By 1997, Rusnak had lost $29.1 million. By 2001, he had lost $300 million. And, in a stroke of incredibly bad luck, he sold over $300,000 in options which brought his total losses to $691 million. Like Leeson, it was Rusnak's ability to work the regulatory system to conceal his losses that allowed him to do much more damage than should have been possible. In the end, Rusnak received a jail sentence of seven-and-a-half years and is on the hook for paying back the $691 million. Mr. Copper - $2.5 Billion Yasuo Hamanaka, better known as Mr. Copper, was a trader for Sumitomo Corporation. Hamanaka specialized in, of course, copper.

He is said to have controlled 5% of the world copper market, but failed in an attempt to corner the market. In 1996, Sumitomo Corp. disclosed $2.6 billion loss on copper trades. The range of his activities and the time period in which they occurred (a full decade ending with a 1996 conviction and eight-year prison sentence) have raised questions about whether he was a rogue trader or simply a member of a price-fixing conspiracy. His conviction centered on his having forged his supervisor's signature in a letter, but the extent to which he went rogue is still in question. Liu Qibing - $200 Million - $1 Billion (unconfirmed) An even more mysterious 2005 copper caper occurred when Liu Qibing, a man who may or may not have been a metals trader for the Chinese government, took a huge bet (around 200,000 tons) that copper prices were going to fall. However, copper prices rose substantially over the life of the trade as global demand for copper increased, which led to massive losses on the trade. As the paper trail led back to the Chinese State Reserve Bureau, other traders realized China would have to fill the amount shorted. This drove copper prices up. The Chinese government tried to depress prices by claiming copper reserves five-times larger than previously estimated and, in a bizarre twist, denied that a Liu Qibing had even existed to place a short. The extent of the losses are up for debate, as are the current whereabouts of the ephemeral Liu Qibing. Brian Hunter and Amaranth - $6.5 Billion Hedge fund traders get an easy ride when it comes to rogue trading because they are expected to take big risks, but Brian Hunter of Amaranth should be considered a textbook case. His gambles in natural gas futures were initially successful, particularly so when Hurricane Katrina wreaked havoc on the infrastructure and pushed prices up while Hunter happened to hold a long position. The huge profits attracted more and more investors to Amaranth, providing Hunter with more capital to gamble with.

Sadly, Hunter's ability to predict the weather turned out to be no more consistent than the TV forecasters' and the natural gas futures turned on him. In one day, on September 14, 2006, Hunter and his colleagues lost $560 million alone. In total, he ended up losing around $6.5 billion, which led to closure of Amaranth. (For more on this, read Losing The Amaranth Gamble .) Jerome Kerviel - $7.1 Billion Surpassing even Hunter's losses, Jerome Kerviel has set the bar improbably high for future rogue traders. His losses from speculation in European futures cost his employer, Societe Generale, more than $7 billion. As with Leeson and Rusnak, Kerviel was able to manipulate the system using knowledge he gained while working in the office that monitored traders prior to being promoted to a trading position. He made no personal profit from his rogue trading. The 2007 mortgage meltdown probably hastened his fall from grace, but the highly leveraged and unapproved trades were bound to have disastrous consequences. Conclusion This is a far from complete list.

It's missing Robert Criton, the scourge of OrangeCounty, Peter Young and his propensity to wear women's clothes at trials, and many other equally compelling tales. At the heart of all of these, however, is the old tale of hubris. When a trader begins to feel that he or she has a special gift for sniffing out money-making positions, it can be a dangerous situation. Unfortunately, luck is a fickle friend. When these formerly magical traders start losing, they often look for ways to magnifying their bets and win back their losses. Aside from the financial damages that rogue traders inflict upon the market, they do serve one very important function; they remind us that seeking exceptional returns means taking on equally exceptional risk. There is no magic trick that can change this fact, so an investor has to know how much risk he or she can safely handle as well as when to quit. Nick Leeson - 2 (a trader looses $7.16 billion) PARIS (Reuters) - French bank Societe Generale (SOGN. PA) disclosed one of the biggest alleged frauds in financial history on Thursday, adding to a wave of gloom surrounding world markets battered by credit market losses. SocGen, France's second-biggest listed bank, said it had uncovered an "exceptional fraud" by one of its traders. It said this would cost the group 4.9 billion euros ($7.16 billion) and announced plans to raise 5.5 billion euros through a capital increase to shore up its balance sheet, also reeling from a crisis in global credit markets. The fraud disclosure brought back memories of Nick Leeson, the British trader who in 1995 brought down blue-blooded merchant bank Barings after racking up huge losses. SocGen said it was in the process of dismissing the Paris-based trader, who it did not name, and added that the trader's managers would leave the company.

It added that its board had rejected an offer by Chairman and Chief Executive Daniel Bouton to resign. SocGen shares were suspended. The Bank of France announced an inquiry by the Banking Commission and said no further comment was necessary after Societe Generale took steps to strengthen its balance sheet. French Economy Minister Christine Lagarde will make a statement during the day on the issue, her office said. "The most serious thing is that this puts into doubt the risk management systems at some banks," said Fortis analyst Carlos Garcia. A source at SocGen said the trader was "not one of its stars" and was relatively young. SocGen said the trader had been handling plain vanilla futures contracts on European stock market indices, betting on broad share market movements. It was not immediately clear what role French police were taking in the investigation. The French prosecutor's office was not available for comment. A rougue trader dooped company out of $7 billion. Societe Generale Hit By Fraud, Write-Downs. Bank Sees $7 Billion In Fraud-Related Loss, $3 Billion in Write-Downs By NICOLAS PARASIE January 24, 2008 12:11 p. m. PARIS -- Massive fraud by a rogue trader at Societe Generale SA has led to a €4.9 billion ($7.16 billion) write-down and is roiling markets as far away as Asia and further shaking investor confidence in Europe's biggest banks. The bank, France's second largest after BNP Paribas SA, revealed early Thursday that it had detected a case of "exceptional fraud" due to a single trader who had concealed enormous losses through a scheme of "elaborate fictitious transactions." The bank identified the trader as Jerome Kerviel.

Mr. Kerviel, 31 years old, joined Societe Generale in August 2000 and was working as a trader on the futures desk at the bank's headquarter near Paris. He was in charge of futures hedging on European equity market indices, known as "plain vanilla" futures. The bank said he was able to dupe the bank's own security system because he had inside knowledge of the control procedures gained from previous jobs with the bank. Though Societe Generale says it first learned of what it termed "massive fraudulent directional positions" on Jan. 19, it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a €4.9 billion write-down, making it potentially the largest loss ever from an alleged rogue trader. But that wasn't the only bad news Societe Generale announced Thursday. It also said it was taking additional €2.05 billion write down in assets related to subprime exposure, and it would launch a capital increase of €5.5 billion in the "following weeks." The write-down and losses related to the trading incident will lead the company to post a net profit of €600 million to €800 million for all of 2007. The disclosure of the write-downs comes a day after another massive sell-off in European markets, as investors reacted to worries about a slowing global economy, the potentially blunted impact of the Federal Reserve's rate cut and whether the subprime woes would continue.

Asian stocks also turned volatile following the news, as early gains in Hong Kong's Hang Seng Index were erased before the market's close, and shares in India traded lower. Shares of SocGen were recently trading down 6.9% at €73.88 after having been suspended from trading at the market's opening. With a market capitalization around €38 billion, nearly half of its market value has been wiped out since the crisis began six months ago. SocGen is slated to report full-year figures Feb. 21. At a press conference, Chief Executive Daniel Bouton apologized to shareholders and said the bank wouldn't offer staff stock options or bonuses for 2007. Neither Mr. Bouton nor co-CEO Philippe Citerne will take a fixed salary through June, he said. The size of the SocGen incident could far surpass one of the most notorious "rogue trader" incidents in global corporate history, the more than $1.3 billion attributed to Nick Leeson in 1995 which bankrupted British bank Barings. Barings collapsed after Mr. Leeson, the bank's Singapore general manager of futures trading, lost ?860 million pounds -- then worth $1.38 billion -- on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years. The fraud was not as big as the 1991 scandal that led to the demise of the Bank of Credit and Commerce International. Claims by depositors and creditors there exceeded $10 billion at the time. International bank regulators seized BCCI, which had headquarters in Luxembourg, London and the Cayman Islands, on July 5, 1991. They acted on auditors' reports that described huge losses from illegal loans to corporate insiders and from trading transactions. In 2006, a 32-year-old trader named Brian Hunter at Amaranth LLC, a hedge fund, made a series of bad bets on natural-gas futures that led to losses of $6 billion. Credit Agricole SA, one of SocGen's French competitors, in August 2007 revealed a similar trading incident that wiped €230 million off third-quarter net profit. Mr. Bouton said SocGen had lodged a legal complaint against the trader who perpetrated the alleged fraud, but the bank was unaware of his whereabouts. The bank said the trader, Mr. Kerviel, had worked at the bank since 2000 and that his salary was €100,000 including bonus.

Mr. Bouton said SocGen had to unwind the positions taken by the trader before they were revealed to the market because of their size. The trader, whose motivation was unclear, helped unwind the positions, he said, adding that Bank of France Governor Christian Noyer and the French market regulator, AMF, were informed Sunday. "Everything happened this weekend, we had zero suspicions before Friday," Mr. Bouton said. He said four or five other staff will leave SocGen, including the line of hierarchy above the trader. The Bank of France and French Finance Minister Christine Lagarde are planning to issue statements later during the day, spokespeople at both institutions said. The Federation of French banks and AMF declined to comment. Ratings agency Fitch downgraded Societe Generale's long-term issuer default rating to AA - from AA following the news. His last year's salary including bonus was $144 K, I don't understand how person with a such relatively low pay could put his hands on billions of dollars. That is my question too. Maybe there is something wrong with European financial world's compensation system.

According to the news that guy moved from back office to middle office and then trading desk in SG. That only worth less than 100,000 EURO. BTW, their tax rate is way higher than ours. That guy, Jerome Kerviel, was able to bypass 5 levels risk control. Mr. Kerviel, are you a Future trader or the Ranbo in SG? Ironically, in 2007 the Risk Magazine ranked SG the first or second best banks in risk control for past 5 years. I think salary level won't tell too much about how much the trader can access, most of them are paid by commissionbonus. Five levels of Risk Management system doesn't mean secure, since every level of the risk management looks at numbers and data reported from operationtrading support group. This should be a lesson for Risk Management nowadays. This guy reported booked fraud transaction, so the reported Equity Delta couldn't reflect the real exposure. So I think this is more of Operational Risk. Yes, it's impressive a single trader can cause that amount of loss. They said that he was taking positions of $73 billion. I don't believe this kind of thing could go unnoticed, especially on European market.

And also their timing to liquidate his positions was perfectly bad: US markets were closed on Monday and AsiaEurope were having a big sell off. Remember when you were a kid and your parents told you to stop playing with matches. Derivatives are not toys one can play around with. I don't believe any level of security could have prevented such an event. Sooner or later it would happen and it did. In my opinion, it is the just way derivatives work that lead to this problem. They are very risky financial instruments. But what I am puzzled about is the fact that this guy was supposedly not motivated by personal financial gains. SG paid him too little. He hates the bank therefore his plan is to bring SG down to ground zero. Only genius can do that. I think his trades were small but in mass volume so it was quite difficult to detect. May be. 7 bln losses by playing deltas on the SPX?? Did anyone happen to notice that this highly implausible tale was immediately followed by SocGen announcing their relatively respectable 2 bln subprime writeoff? As a rule, I am not a conspiracy nut but this story smells(like poo) There are more to this than to meet the eyes.

Most people I talk to think SG is using him as a scapegoat to hide their loss in subprime. In the days to come, we will learn more details about this. NYT runs this latest article which is really interesting. January 26, 2008 ‘Rogue Trader’ Is Remembered as Mr. Average. By DOREEN CARVAJAL and CAROLINE BROTHERS PARIS — Jerome Kerviel was too middling to be considered a loser. Until he was charged by Societe Generale with perpetrating the biggest fraud of its kind in banking history, there was nothing superlative about him. He failed in a bid for town council in his 20s; he never rose higher than a green belt, a midlevel rank, after years of judo training — because of his bad knees; and he attended an average college where he earned respectable but unremarkable grades. “People who want to be golden boys or clever in the market don’t come here,” said Valerie Buthion, the director of the University of Lyon’s economic and financial engineering department, where Mr. Kerviel earned a master’s degree in market finance. “The showoffs don’t come.” As they sought to explain how a low-level trader caused a $7.2 billion loss, Mr. Kerviel’s former bosses at Societe Generale, one of France’s oldest and most venerated banks, portrayed him as a “brilliant” trader who eluded sophisticated detection systems. But the mundane outlines of the life of Mr. Kerviel, 31, betray no flashes of brilliance. Rather, the portrait of him painted by those who knew him shows a reserved man who most often blended into the background. His less-than-impressive persona has led to doubts that he could be the sole culprit in the bank’s enormous losses. Despite a lack of evidence, some financial experts, especially in France, have suggested that Mr. Kerviel might be a scapegoat for other losses incurred by Societe Generale, some perhaps related to subprime mortgages. Mr. Kerviel’s 100,000-euro salary ($147,000) as a trader was paltry compared with salaries of his colleagues, and in 2006 he received only a 1.5 percent raise.

Traders who worked with Mr. Kerviel said he was quiet and low key — smart, but hardly a computer genius. When the news broke, “I saw his photograph and thought, no, it’s not possible. It couldn’t be him,” said one junior trader who worked with him and did not want to be identified because he was not authorized to speak to the media. The son of a hairdresser and a vocational school metal shop teacher, who died about two years ago, Mr. Kerviel was born in Pont-l’Abbe, a small town on Brittany’s fog-enveloped coast. He lived there until going to college, the town’s mayor, Thierry Mavic, told The Telegramme of Brest, in Brittany. “He was a poised, calm, reflective young man. A little reserved,” Mr. Mavic said. Mr. Kerviel completed his undergraduate studies in Nantes and then attended the University of Lyon for graduate school. The university opened more than 10 years ago backed by major French banks, with the express purpose of training students for the unglamorous middle and back-office functions of processing and monitoring trades. “He was a student just like the others, a young man, and he didn’t distinguish himself from the others,” said one of his former teachers, Gisele Reynaud, who taught Mr. Kerviel how to track and monitor trades.

Like many of his classmates, Mr. Kerviel got his professional start with a paid internship at Banque Nationale de Paris. He joined Societe Generale in 2000. Pont-l’Abbe’s mayor, Mr. Mavic, thought so much of Mr. Kerviel that he invited him to join him on his list of candidates to run in municipal elections in 2001. (You do not have to live in a town in France to be on its city council, or even to be its mayor.) Mr. Mavic told The Telegramme that Mr. Kerviel did not get enough votes to win a seat. Mr. Kerviel’s former judo teacher, Philippe Orhant, said he taught him judo for more than six years and that Mr. Kerviel later taught martial arts to children. “He worked well with people,” recalled Mr. Orhant, who said that he ultimately dropped out of the sport with a green belt because of medical problems with his knees. With publicity intensifying about the reclusive former trader, grim family members in Pont-l’Abbe were in no mood to talk about him. “Sorry,” said his aunt, Raymonde Kerviel, before briskly slamming down the telephone receiver. “I have no interest in talking about this.” In the French media, former colleagues and even agents in a neighborhood real estate office near his apartment remembered him for his understated sartorial elegance and a boyish resemblance to Tom Cruise. Andre Tiran, the dean of the faculty at the University of Lyon, theorized that Mr. Kerviel’s training in risk control management might have given him some critical advantages in any financial scheming. “It’s a little bit like becoming a thief with training in locksmithing,” Mr. Tiran said. “If you’re good at being a locksmith, then to steal is easier.

” Bank officials said Mr. Kerviel did not profit personally from his scheme. But at a news conference Thursday, they called him a “fragile being” and said he had had “family problems.” French financial experts, both here and in Davos, Switzerland, for the World Economic Forum, voiced skepticism that one unremarkable low-level trader could have carried out the most expensive fraud by a rogue trader ever. Both the governor of the French central bank, Christian Noyer, and the French prime minister, Francois Fillon, insisted that the Kerviel case had nothing to do with the volatile stock markets around the world, or with the subprime mess. “You can’t throw everything together,” said Mr. Noyer. But Friday, Mr. Fillon seemed to criticize the central bank governor. While speaking to reporters in Luxembourg, Mr. Fillon said Mr. Noyer should have alerted him sooner to Societe Generale’s huge trading loss. He only learned on Wednesday, though central bank authorities had known since the weekend. Mr. Fillon ordered the French finance minister to complete an investigation into the case in the next eight days. Mr. Kerviel remained hidden from public view Friday. A handwritten note posted in his apartment building in the wealthy suburb of Neuilly-sur-Seine urged swarms of journalists to leave residents alone because the former trader had taken shelter elsewhere. “Kerviel,” the note read. “Is not known in the building.” Later in the day, plainclothes policemen arrived to search the apartment. Mr. Kerviel’s lawyer, Elisabeth Meyer, who said Thursday that Mr. Kerviel was available to meet with authorities, was not answering questions about her client Friday.

The only place Mr. Kerviel could be heard was on his answering machine. Some news organizations posted the softly spoken message on their Web sites. “Bonjour,” the voice says. “You’ve reached the mobile telephone of Jerome. I’m not available for the moment, so please leave a message, and I’ll contact you as soon as possible.” How Nick Leeson caused the collapse of Barings Bank. In 1995, the financial markets were shaken by a massive scandal. Barings, one of the most prestigious banks in the United Kingdom is bankrupt following losses caused by Nick Leeson, one of its traders, aged 28 years. Article also available in : English | francais.

London beginning of the year 1990. The prestigious Barings Bank sends one of their traders, a young Englishman named Nick Leeson born in February 1997, to work in its Singapore branch. Barings is one of the most reputable financial institutions in all of the United Kingdom. Founded in 1762 by the Dutch Johann Baring, who had immigrated to England, Barings formed part of the country?s history. Even the Queen of England was among its clients. Coming from a relatively modest background (his father is a plasterer), Nick Leeson did not follow higher education, but this is not a requirement needed to find a job in a bank. His adolescence was spent at Watford where he attended high school, whereafter he began to work at Coutts & Company and then spent two years at Morgan Stanley. Here he took up a position as an operations assistant, allowing him to become familiar with the financial markets which was gaining more significance towards the end of the 1980?s. Leeson then joined Barings, here he quickly made a good impression within the respectable establishment. He was promoted on the trading floor and in 1990, was appointed manager in Singapore where he had to operate on the “futures” of SIMEX (Singapore International Monetary Exchange). A relentless worker, Nick Leeson quickly became a renowned operator of the derivative products market on the SIMEX, and is considered as one of those who “moves” the market. From 1992, Leeson made unauthorized speculative trades that at first made huge contributions for Barings - up to 10% of the bank?s profits at the end of 1993. He became a star within the organisation, earning unlimited trust from his London bosses who considered him nearly infallible. Barely aged 25, Leeson had a professional situation that he had never dreamed of, even though he had entered into a professional life about ten years too early. However, he soon lost money in his operations and hid the losses in an error account, 88888.

He claimed that the account had been opened in order to correct an error made by an inexperienced member of the team. At the same time, Leeson hid documents from statutory auditors of the bank, making the internal control of Barings seem completely inefficient. At the end of 1994, his total losses amounted to more than 208 million pounds, almost half of the capital of Barings. On January 16th, 1995, with the aim of "recovering" his losses, Leeson placed a short straddle on Singapore Stock Exchange and on Nikkei Stock Exchange, betting that Nikkei would drop below 19 000 points. But the next day, the unexpected earthquake of Kobe shattered his strategy. Nikkei lost 7 % in the week while the Japanese economy seemed on the verge of recovery after 30 weeks of recession. Nick Leeson took a 7 billion dollar value futures position in Japanese equities and interest rates, linked to the variation of Nikkei. He was "long" on Nikkei. In the three days following the earthquake of Kobe, Leeson bought more than 20 000 futures, each worth 180 000 dollars. He tried to recoup his losses by taking even more risky positions, betting that the Nikkei Stock Exchange would make a rapid recovery; he believed he could move the market but he lost his bet, worsening his losses. They attained an abysmal low, (1,4 billion dollars), more than double the bank?s capital who is now bankrupt because its own capital would be insufficient to absorb the losses generated by Leeson.

When taking into consideration the total losses and the initiatives taken by Leeson, how can one explain the lack of reaction from a bank as reputable as Barings? There were several factors that played to Leeson?s advantage: In Singapore, Leeson enjoyed a freedom within the local office - even an internal memo from 1993 proved to have no consequence; this would shown the lack of surveillance in this office as well as the risk of possible disaster. What?s more, Leeson operated in both the dealing desk (front office) and the back office. So he confirmed and settled trades transacted by the front office - which he himself passed! He was therefore able to hide what he wanted. The profits brought in by Leeson instilled confidence in management who lacked knowledge in subtile trading techniques and financial markets, and therefore did not pose any questions at Leeson. They did not seem to be aware of the risks incurred by the bank. Leeson made false declarations to regulation authorities which allowed him to accumulate his losses and to avoid a margin call which should have audited losses from day to day. It is true that these false declarations did not attract the attention of control authorities in Singapore. Barings benefited from special privileges from the Bank of England (an exception to the rule that a bank could not lend more that 25% of its capital to any one entity.) Finally, nothing was detected by statutory auditors and control interns, despite the fact that Leeson had hidden certain losses and had forged documents - both of which should have drawn attention to him. This proves that the account regulation procedures within the institution were completely inefficient. Feeling that his losses had become to great and seeing that the bank was on the verge of a crisis, Leeson decided to flee, leaving a note which read “I?m sorry”. He went to Malaysia, Thailand and finally Germany.

Here he was arrested upon landing and extradited back to Singapore on 2 March 1995. He was condemned to six and a half years in prison but was released in 1999 after a diagnosis of colon cancer. In 1996 he published an autobiography “Rogue Trader” in which he detailed his acts leading to the collapse of Barings. The book was later made into a film starring Ewan McGregor as Leeson. The fall of Barings caused an unprecedented crisis within the city. Nine senior managers were accused of having badly managed the situation and in March 1995 the bank (only the parent company) was bought by Dutch group ING. It was the less than glorious disappearance of a bank founded in the 18th century after 223 years of existence. The bankruptcy of Barings had a world-wide impact, affecting even those who were not among the financial circles. The public expressed concern about the use of by-products and about the "madness of financial markets" where young "golden boys" of less than 30 years can cause the demise of financial institutions which nevertheless had experienced a dozen crises during two hundred years. At the end of the day, there are always risks in the financial markets that even teams with the best specialists who hold Nobel prizes are not able to avoid. This affair has nevertheless lead to the creation of new jobs such as "compliance officers," has strengthened the role of risk control within investment banks and has created a separation between Front, Middle and Back Office functions. Article also available in : English | francais. How Rogue Trader Nick Leeson Brought Down Britain’s Oldest Bank. When it comes to banking scandals, no name is more infamous than that of Nick Leeson. While the likes of UBS trader Kweku Adoboli and former Allfirst banker John Rusnak were responsible for bigger losses, Leeson’s illicit trading in the early 1990s brought down Barings Bank, Britain’s oldest and most respected investment bank. It was an event that sent shock waves throughout the entire banking industry.

At the time, no one could believe that just one man could be responsible for such a cataclysmic banking collapse, but Leeson’s actions, and his unfettered access to funds, was seen as a warning shot for the banking industry, with many institutions realizing just how vulnerable they were to rogue trading. Read the story, and watch the documentary at the end of the article. Traditionally in the UK, those working in financial services tended to come from middle class families with finance degrees earned from the top universities. However, Leeson had no such background. Leeson was part of a new wave of banking professionals who were young, ambitious and working class. This new breed added energy and dynamism to what was a rather stuffy and archaic industry, that was in need of a new approach to help it compete in the world’s investment markets. Born in 1967, Nick Leeson came from a working class family in Watford, England. After leaving school, and without a degree, he managed to land a job as a clerk for Coutts, a well-respected and traditional bank that counted the Queen of England as one of its customers. He then moved onto Morgan Stanley, where he worked for two years, until moving to Barings in 1989. While only 22 years old, he worked his way up to become a rising star in the far eastern currency markets. Barings Bank Years.

Modern banks offer a wide range of different services, from investment trading and merchant services, to personal banking, loans, mortgages and insurance. However, Barings was a bank very much in the old model. Set up in 1762 by wool traders Francis and John Baring, the bank was one of the most respected financial institutions in the UK. Barings had survived two World Wars and several depressions, and while nowhere near the largest of the UK’s banking institutions, the name Barings was synonymous for probity and trustworthiness, and was trusted with money belonging to many of the British elite. However, in a growing global economy, Barings, like many of the traditional British investment banks, was having to adapt. The Far East was seen as the place to be, where young, fresh talent like Nick Leeson were making the banks enormous profits. By 1993, Leeson had single-handedly made 10% of Barings annual profits from the banks’ new Singapore office where he was trading in Singapore’s International Monetary Exchange. Leeson’s success, however, was all a front. Nick Leeson, the Rogue Trader. As early as 1992, Leeson was making unauthorized speculative trades, using customer funds. This practice was both illegal and highly risky. In his book, Rogue Trader , which was turned into a film starring Ewan McGregor, Leeson claimed his unauthorized trading started as a means of recovering a loss mistakenly made by one of his colleagues. He had set up an error account, numbered 88888 (the number 8 considered lucky by many Far Eastern countries), from which he made speculative trades, first to recover losses, and then to generate extra profits for the bank. However, when the far eastern markets plummeted in 1994, his error account had losses of over ?208 million ($310 million+, based on the exchange rate in 1994), which Leeson tried to recover with further speculative trading.

His main error was trying to support the market to avoid further losses. He added to his already losing position, buying more and more contracts, hoping that his buying would help push the market up. It didn’t, and the mistake obviously ending up costing dearly (a mistake all traders need to avoid…throwing good money after bad). The Barings Bank Collapse. Eventually, after an internal audit in 1995, Barings’ discovered losses of ?827 million ($1.29 billion, based on average exchange rate in 1995) in Leeson’s error account, an amount that nearly equated to the entire assets of the bank. While attempts were made to save the bank, Barings crashed and Dutch banking group ING eventually bought it for the paltry sum of ?1 ($1.55, based on the exchange rate at the time). After being discovered, Leeson fled Singapore, but was arrested in Germany and extradited, serving four years in Singapore’s notorious Changi Prison. On his release in 1999, he released his autobiography, which heavily criticized the banking industry for allowing a single trader to have such unfettered access to funds, and blamed part of the bank’s downfall on the pressure on traders to turn a profit. For more, watch 25 Million Pounds: The Nick Leeson Story . This documentary won the Best Science and Nature Documentary in the 1998 San Francisco International Film Festival. You May Also Like these Videos: Cancel Crash – Documentary about the 1987 stock market crash, told by the traders who were there, and arguably halted an even further meltdown. Nova – Mind Over Money – An entertaining and penetrating exploration of why mainstream economists failed to predict the crash of 2008 and why we so often make irrational financial decisions. The program reveals how our emotions interfere with our decision-making and explores controversial new arguments about the world of finance. Floored: Into the Pit (documentary) – A fantastic look at the Chicago trading pits, and the traders who made their livings there. Quants: The Alchemists of Wall Street – Interesting documentary on trading and quantitative analystsprogrammers–or “quants” who are behind the mathematical and financial models used today. Overcoming Not Wanting to Take a Trading Loss (Loss Aversion) Loss aversion is an unwillingness to accept a loss once in a trade.

You tell yourself you’ll get out if you lose a certain amount money, but instead of closing the trade when you should, you decide to hold the trade and let the loss grow…in the hope that by giving the trade “more room” it will eventually turn around in your favor. The reason commonly given is that if the trade is closed the loss is realized and there is no way to make that money back on that trade (even though a small loss can be easily made back on other trades). The trader is hoping their trade will turn around and move into a profitable position, alleviating them of the painful task of taking a loss on a trade. Loss aversion is a natural human tendency, but it can wreak havoc on a trading account if the trader doesn’t learn how to manage this psychological issue. Below, learn how it manifests (the symptoms) and how to manage it. Trading Problems Created by Loss Aversion. Loss aversion causes you to deviate from your trading plan. Based on your method, you know that you will win about 60% of your trades, just as an example, and that your method produces a certain amount of profitability over each month of trading (accounting for winners and losers). The problem is, by not adhering to risk management rules, and letting a trading loss grow, losses become bigger than originally calculated.

Those additional losses, even one each week, can turn a profitable system into an unprofitable one. With leverage, one loss which is allowed to keep running can clean out a whole account. You should be trading with a plan that has some sort of positive track record–this is accomplished by perfecting your method in a demo account before risking real money. None of us like to lose, but by succumbing to loss aversion our plan is thrown out the window. The trading method is no longer based on cold-hard calculation, and results will likely be poor or inconsistent at best. Causes of Loss Aversion in Trading. We fear loss because our brain does not assign the same weight to a $100 loss as it does to $100 gain. The happiness of finding $100 on the street doesn’t equate to the frustration of opening your wallet and realizing you lost $100 you needed to pay for something. Think of it this way, not having a relationship with someone isn’t as painful as having someone and then losing them. Our brain typically assigns 2.5 times the weight to a loss, as it does to a gain (Kahneman and Tversky, 1979). We don’t like to lose, and statistics show the majority of humans will gamble in order to avoid a loss. In a 1979 study, participants were asked if they preferred a $7500 loss, or they could “roll the dice” for a 75% chance of losing $10,000 or a 25% chance of the loss being $0. Most opted to gamble. In trading terms, this is like moving your stop loss order. You can take your loss, or let it mount.

If you let it mount there is a possibility you may get back to even, but there is a good chance you’ll end up losing more because you’ve already been proven wrong on the trade. The real problem is that if you get back to “even” after gambling in this way, your behavior is rewarded. You did the wrong the thing (you went against your trading plan and your stop loss rules) and it worked out. But most of the time it won’t. It’s a trap, and it lures in new traders and casino gamblers alike. Managing Loss Aversion in Trading. The unfortunate part is that there is no easy fix for loss aversion. Losing sucks, and as humans we don’t like it. For many, this results in a steady stream of trading problems. The good news is that there is a solution…it’s just not easy. Where the issue stems from doesn’t matter, ultimately you need to conquer it. That doesn’t mean you won’t want to avoid losses, it just means you accept those feelings and don’t let those feelings affect your actions. It is within your control. Think about other areas of your life where you feel strong emotion, but don’t act on it. Instead, you remain present, compose yourself and act according to your plan or principles. Therefore, the first step in managing loss aversion is to have a plan in the first place. If you get into a trade and don’t know what to do if it moves in your favor, moves against you, or does nothing, then you shouldn’t be in the trade at all. Your plan of attack lets you know what you will do in each scenario.

It also lets you know which trades to take and which to avoid (See: Forex Trading Strategies Guide for Day and Swing Traders). That plan must provide details on how you will enter and exit positions, and then you must follow that plan no matter what sort of emotions you face while in those trades. There will be a strong compulsion to let a loss mount because you don’t want to realizebook the actual loss, due to ego or some other reason. You will feel these things. Admit it, and try to continually bring yourself back to your trading plan, letting the plan play out. Do this in a demo account until you are like a robot at following your plan. Only then should you switch to real money. When you switch to real month, start out trading with the smallest position size possible so it is easier to maintain your robotic focus. Emotions don’t disappear, you just learn to trade in spite of them. If you have adequately tested your system, and it is profitable, then realize that the results of that system account for losing trades. You don’t need to avoid losses; the losses are already factored into the profitability, so you don’t need to change a thing. Take your loss when you are supposed to and stick to the plan. That’s the only way to realize the profitability of your system. It easier said than done, though. Therefore, I recommend all new traders (or any trader who is having trouble sticking to their trading plan) put out a stop loss order and a target at the outset of each trade.

Then don’t touch anything. Watch, and simply sit on your hands. Don’t touch your orders, don’t touch your screen, just sit on your hands until either your target or stop gets hit. Follow this method for at least several months. It will get you used to the feeling of discomfort, and most of all it will prove to you that your system is profitable just as it is, without your intervention (assuming it is actually a profitable system to begin with). Even if it isn’t profitable the exercise is a good one for discipline. Trading is mostly psychological–being able to overcome these trading psychology hurdles. Not succumbing to emotional moments, and seeing a plan through is what creates great traders, great leaders, great generals, etc. Many traders will find that letting the price just hit their stop or target, with no intervention, is fantastic, and the journey ends there. Others will want to more actively mange positions. Only after months, or hundreds of trades, of letting the price hit the stop or target hit should you attempt to actively manage trades.

Don’t skip steps, otherwise, the same issues will continue to ail you. Practice discipline and following your plan by letting the price hit your stop or target, that is it. Only when that discipline is firmly entrenched should you consider more elaborate strategies or attempting to mange each trade according to a plan. If, after developing your discipline, you decide to actively mange each trade still set a stop loss and target. The stop loss is never expanded, but the stop loss can be reduced if the price moves in your favor. The target can be expanded or contracted, based on current conditions, but the expected reward should always be greater than the risk (stop) at the outset of the trade. Actively trade management is also mostly psychological, based on how you strategize and plan for various scenarios that may occur (this is covered in How to Day Trade Forex in 2 Hours or Less). Loss Aversion and Trading Psychology – Final Word. Loss aversion manifests itself as an unwillingness to take a loss. When this occurs, the trading plan has been abandoned, and therefore, trading results are likely to be unprofitable or inconsistent at best. As humans we put more weight on losses than gains, so the problem won’t just go away. You need to deal with it, face it and practice dealing with these emotions in real time. Just readingknowing about it isn’t enough. The best way to build discipline and deal with feelings of loss aversion is to trade a strategy for several months (or hundreds of trades) letting the price hit a stop or target which are set at the time the trade is opened. Sit on your hands, and learn to deal with the emotions, knowing that your risk is controlled, your target is set and your plan is in motion.

As the loss aversion dissipates, and you become more disciplined, only then should you consider more advanced methods such as actively managing your trades while in them. By Cory Mitchell, CMT. Check out my Forex Strategies Guide for Day and Swing Traders eBook. Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your skill step by step. You May Also Like: Overcoming Trading Anxiety By Understanding the Causes and Process of Anxiety – There are only 2 causes of anxiety. And one can be used to control the other. Then, there are three ways to deal with anxiety–2 of which are destructive, and one which is the way out. Trading Psychology Quirks – Availability Bias – A common human tendency, where we simply draw on how many examples of something we can think of instead of studying the facts. It can greatly affect trading…here is why, and how to manage it. Trading Psychology – The 4 Stages of Trader Development – Four very broad stages you will go through as a traders; by understanding the stages you may be able to accelerate your progress and avoid common pitfalls. What is the single biggest reason for failure in trading? Is it bad analysis?

Is it costs and execution? Those are all just excuses that every trader uses to justify their losses. I’ve modified my strategies a dozen times. I’ve mis-analyzed markets almost on a daily basis. My costs are often as much as 50% of my gross profits. And yet I have been consistently profitable this whole year and haven’t had a losing trade since Brexit. Why? Because I always assume I am wrong. When you go back and study all the great blow up trades in history from Nick Leeson to Long Term Capital to the Whale Trade of JP Morgan there is only one factor that unites them all. They all thought they were right and they kept fighting the market until it broke them. In fact I bet if you were to do your own “greatest hits” of blow up trades the dynamic that ties them altogether would be the same. You just couldn’t imagine an outcome opposite your expectations and as result you were margined called. I certainly was. I can’t even begin to count how many times I blew up my FX accounts when I first started trading. And in fact that behavior didn’t just go away. It took years of hitting my head against the wall, before I finally tried another way. Now I look at the market differently. I only have two impulses whenever I put on a trade -- win right away, or get the f - out with minimal loss. As a result of this approach I often miss successful setups and even more often leave lots of pips on the table.

Any trading “guru” would shake his head in disgust at my three-yards-and-a-cloud-of-dust style of trading. And I am the first to admit that I leave too much pips on the table. But I also know that I wouldn’t change my approach for a million bucks because I know that all trading books and other fables set up a false dichotomy. “Sell your losers and let your winners” run they say. But in real life 9 out 10 of your winners will turn into losers if you hold them long enough, especially in a two way market like FX. So all you will end up doing is cutting losses, until such time when you will get tired and annoyed and will make the biggest mistake of all which is letting losses run uncapped. That pretty much is the story of every blow up in FX. It starts with bad advice and then proceeds with bad behaviour and ends up with stubborn refusal to admit you are wrong. How much easier would it be, if being wrong was your default assumption? If you stopped trying to make trades and just started to make probabilistic bets, keeping every loss to less than 2% of your capital? In trading being wrong is being strong, but for most of us it takes years to realize that idea. Thanks Boris, I have brown up three trading accounts with considerable good capital and the single reason is holding a losing trade and “hoping” the price would reverse. The price would begin to retrace a little bit at some point and this could go for a whole day. This gave me false hopes. I could enter a second trade now that the price is even better.

Then without knowing, price shoots in the original direction, then hope it would come back. This would happen all the time until a margin call comes in and finally the account goes silent.



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