The Rise Of The Rogue Trader

 

Amy Fontinelle, On Monday October 17, 2011, 4:29 pm EDT

With the recent scandal in which trader Kweku Adoboli lost 1.3 billion pounds for his employer, the Swiss investment bank UBS, rogue traders have been in the news. A rogue trader is a trader who takes unauthorized investing risks to attempt massive gains, but makes reckless choices in the process. These professionals may work as fund managers, at trading desks or in other capacities where they can invest large amounts of other people's money.

Playing by Their Own Rules

What makes these traders "rogue" is their unethical behavior. They may act without the authorization of their companies or supervisors, or exceed the limits they are given. Their investment styles might be more accurately described as speculating, betting or gambling. They may use enormous amounts of leverage or take high-risk positions in derivatives or currencies. Rogue traders often seek huge profits for themselves, but these individuals' professional positions and trading behavior, not their motivations, are what define them as rogue traders.

Rogue traders are usually willing to circumvent government regulations and company rules. These traders might initially be successful and emboldened by their results. They may take larger and larger risks to maintain or improve their track records. Ultimately, their risky bets can cause major losses for the companies they work for and bring criminal charges for fraud, collusion, breach of trust and more. These charges can bring jail time and fines to rogue traders.

Rogue Traders In Recent History

Over the last 20 years, we've seen a handful of major rogue trading scandals. In 1992, Harshad Mehta and other brokers colluded to manipulate the Bombay Stock Exchange. In 1995, Nick Leeson incurred a $1.4-billion loss for Barings bank that brought down the centuries-old institution. Trader Jerome Kerviel incurred a $7-billion loss for French bank Societe Generale, the largest uncovered thus far. Other rogue traders have been caught in Japan, the United States, Australia and the United Kingdom. There may be more rogue traders than we know about. Those who have been successful or who have avoided getting caught in unauthorized or illegal trading activities might be considered investment superstars or be quietly going about their business.

Some rogue traders are infamous not just for their scandalous trading behavior, but for their personal behavior. Stockbroker Jordan Belfort, the "Wolf of Wall Street," was convicted of money laundering and fraud in a relatively small pump-and-dump scheme that lost $200 million, but he is also known for reckless and outlandish acts, including organizing a trading floor midget-throwing contest, using massive quantities of illegal drugs and destroying a yacht and other vehicles.

A Rogue Trader's Downfall

A sudden, major loss usually triggers a rogue trader's demise. Complex trading strategies can go bad when something unexpected happens in the markets. In Leeson's case, nature intervened. A short straddle he placed on the Nikkei became a huge loss after an earthquake in Kobe.

Rogue traders might also be caught if a co-worker reports their behavior or if regulatory authorities catch on, as happened with Peter Young and an SEC investigation. An exchange may notice a particular trader's behavior or be tipped off, which occurred in the case of Jerome Kerviel and the Eurex derivatives exchange. Adoboli tried to hide his massive losses, but got caught falsifying accounting records.

The Fallout of Rogue Trading

A single rogue trader can bring down an entire company, no matter how well established it is or how successful it has been in the past. A rogue trader's influence can easily extend outside of his or her company. When a rogue trading scandal comes to light, it can cause a major drop in the share price of the bank or investment company associated with the scandal, which happened in September with UBS. Furthermore, a company with a tarnished name may have trouble retaining existing clients and attracting new ones. Top executives can also be forced out of the company for their failure to catch the problem before it exploded, or as part of a company's attempt to regain the public's trust.

The Bottom Line

Losses from rogue trading can be far reaching and extend worldwide. In the aftermath, victims and fearful onlookers may call out for increased government regulation, such as the recent suggestion to ban ETFs, in an attempt to prevent the next fraud. Regulations cannot put a stop to human ingenuity or fallibility. It will only be a matter of time before the next rogue trading scandal emerges.

The market (YM) went down today due to Germany's economic problem. Not so good news with the market.

Once again, Europe Trashes the Market

Posted October 17th, 2011 by theStockMasters...

 

Eurotrash killed stocks again today, its becoming more predicatable than ever. We can't go more than a week without some bad news out of the Euro-zone about default this and sovereign-debt that.
In the usual fashion the market tanks.
Case of the Monday's.

The 411 of today's decline -- (http://www.allheadlinenews.com) The Dow Jones Industrial Average was off more than 130 points in morning trading on Monday after comments out of Germany clouded the prospects of a quick resolution in the mounting eurozone sovereign debt crisis.

The S&P 500 Index was off 13 points and the NASDAQ was down more than 27. Also dragging U.S. stocks lower was a report showing New York-area manufacturing waned more than forecast.

The MSCI All Country Index was off 0.7 percent following last week's stellar 5.4 percent rally. Oil gave back 0.7 percent as the slowing economy once again began a concern for future oil demand.

The drop in stocks worldwide followed comments from German Chancellor Angela Merkel's chief spokesperson that European Union leaders would not provide a quick ending for the ballooning debt crisis in the eurozone that global policy makers have been hoping for when parties meet at a summit on Oct, 23.

Wells Fargo was down 5.6 percent after the United States' largest home lender reported a drop in third quarter earnings and narrower margins. Citigroup climbed 2.6 percent after reporting profits rose 74 percent at the bank, surprising and beating analysts' estimates.
Gold, considered a safe haven in times of uncertainty and global discontent, was brighter by $3 an ounce, trading at $1,686.

US Stock Market: Bulls vs. Bears; Historians vs. Risk Takers?
October 17, 2011
David R. Kotok

“The jury is still out.” That legal term has been a headline for two centuries. In the 1940s, its usage morphed to a broader reference factual findings of all types. We will apply it to the stock market today.

The jury is still out but the evidence keeps coming in.

For the last several months, we posited that the August 8 bottom of the S&P 500 Index at the 1100 level was a robust selling climax. Whether it was an interim selling climax or a final selling climax is unresolved. That jury is still out.

The selling commenced at the beginning of May. It accelerated sharply to the down side at the end of July and into early August. The reasons that caused the sell-off are history now, and discussion of them is redundant.

We have written on several occasions that the 1100 level was established with intraday trading on August 8, tested twice in the futures market and held. In the subsequent rally and sell-off, the 1100 level was pierced on only one day. The 1100 S&P level has continued to hold and reflect a tentative bear market bottom. The most recent test that successfully reaffirmed this bottoming level of the S&P 500 Index occurred on October 3. Markets have rallied strongly since. The S&P 500 index is about 1228 in Asian futures market pricing this morning.

Many of our internal studies indicate that the potential for an upward move in stock prices is huge. We are positioning accordingly and have been since the sell off intensified in July. We have established this position s risk takers, not as history book writers.

On the other hand, there are conflicting and negative forecasts that argue the opposite of Cumberland Advisors’ position. The negative forecasts are usually coupled with recession forecasts. Readers see them every day on TV, hear them on radio and read them in the financial press. Harsh and negative forecasts dominate the media.

Meanwhile, the economic evidence is mixed. It does not support the recession scenario. The US economy is not shrinking. The economy continues to muddle along at a slow growth rate. There is no strongly robust, apparently upward, trend. There probably will not be one for several more years. Slow growth centered on 2% is more likely to be the norm.

Fears of a financial market meltdown or a repeat of Lehman Brothers/ AIG failures of 2008 continue. Very negative pictures can be painted on the outcomes of the European sovereign debt crisis. Other negatives can point to more deteriorating factors in the United States, such as the weak housing market and the high unemployment rate.

In our view, all of these factors are known. They have been established for some time. They have been mixed into the pricing expectations in markets. In essence, they are “old news”.

As investment risk takers, we believe the August 8 climax at 1100 level was a final climax. That determination is the basis for our investment posture. The climax is/was enough for us to take a position on markets. It is not enough for us to write a history book chapter. For historians, a candid assessment of the outcomes would suggest that there is no sure way anyone can know now. At the very least it was a robust interim climax and set the stage for the strengthening stock market that has occurred since.

For historians, it remains to be seen if the 1100 level was the final selling climax low in a market that peaked on April 29, sold down in August, retested the low in October, and is firmly in an uptrend. Historians will not know that until the market is much higher and more time has passed. Note that here is an important difference between investment risk takers and history book writers.

Historical studies suggest that there are two possible scenarios at work. At this point in time they would look alike so either one is possible.

Scenario 1.

History says that if there is a serious, prolonged recession in the next year or so, then it is likely that we witnessed only an interim selling climax on August 8. That means there is another leg down in stock prices ahead of us. That is the bear case promoted by numerous money managers and advisory firms who forecast an S&P 500 Index level of somewhere between 800 and 900 as a bottom.

That is not the perspective at Cumberland. We support a second scenario.

Scenario 2.

That history says there may not be a second leg down recession. Instead it calls for a slow but steady rate of growth centered on 2% in real terms. It will be accompanied by low rates of inflation and very low interest rates. This is likely to be in place for the next couple of years. This means the profit share to business will remain very high, and it means there will be a slow but steady growth rate of nominal GDP. From this rising nominal GDP, the earnings for American business are likely to stay high and continue to rise.

Furthermore, there is some evidence that the housing market is bottoming in some regions. This data is also mixed. However, there are gradual signs that a base is being formed in some housing sectors. The result of that is to ease the pressures on the banking system, and indicate that the credit problems attached to the housing debacle may begin to subside.

If this is so, and we believe it is, then the financial stocks, which have been devastated for four years, are currently positioned for a buying opportunity. In Cumberland’s case, we have scaled into financials several times and taken up the weights in the regional banks. So far, that is proving the correct course of action. We have taken the overall financials exposure above market weight. We continue to be a scaled buyer in financials.

For an excellent discussion of the banking sector, see Andrew Bary’s column in Barron’s this weekend. For superb detailed discussion about banks see Dick Bove’s research at Rochdale Securities. Additional excellent discussion is found in Jason Benderly’s proprietary work on the financials and markets.

Ten days ago, the entire banking system of the United States was for sale below its stated book value. One could argue it was for sale below its tangible book value, which means you could buy all the banks in the United States at stock exchange prices trading for less than their liquidation value. Clearly, that is an absurd pricing level.

Are banks now sound? Answer: some are, some are not. Are there still problems ahead in the financials and in the banking sector? Obviously, yes. Is regulatory change an issue? Again, yes. Are earnings derived from net interest margin an issue? Once again, yes. Does that mean that banks are dead forever? Our answer is a resounding no.

The time to enter a sector and start to take up the weights is when it has been devastated in a bear market for several years and priced to an extreme. When you price the entire banking sector below its liquidation value, below its tangible book value, you are seeing a pricing level in a climate where all the bad news is known or identified. Only then are you are defining an entry point. Further, the financial sector has lost ten percentage points of the value share of the stock market since its peak. Think about this sector where it once was 24% of the market weight and derived 40% of the market’s earnings. Now it is 14% of the market weight. Its earnings are substantially down from the peak earnings that were extant five years ago when everyone wanted to own financials.

In summary, we do not know for sure if the 1100 level on the S&P 500 Index was a final selling climax established level or is an interim selling climax level. It will take more time to write that history book chapter. We are basing our investment risk taking action on the likelihood it was a final climax. It will take months before that finding is firmly established.

We do know that, at least, we did have a robust interim selling climax. The 1100 level was tested several times and has demonstrated support. We do know that buyers are tepidly coming into stocks. There is a large amount – trillions of un-invested funds – that face decisions about whether to nibble at the stock market or stay in the bond market or cash equivalents at very, very low interest rates. In our view, the US stock market is currently a place of opportunity. We are in it.

Cumberland’s US exchange-traded fund accounts continue to be fully invested in diversified ETF portfolios. We are increasingly emphasizing growth-oriented ETFs at this time, and mixing the weights and sectors accordingly. We are gradually taking up exposure to the financial sector. We are targeting an S&P 500 Index level of 1350-1400 based on a high profit share derived from a GDP above $15 trillion. We expect that nominal GDP to rise at about a 4% annual rate or higher for the rest of this decade. We project that the GDP will reach $20 trillion by this decade’s end. Our longer-term target for the US stock market is the 2000 level or higher. If the GDP profit share rises to the level we saw in the 1950s, that stock market outcome could be much higher.
~~~
David R. Kotok, Chairman and Chief Investment Officer

Stock futures turn negative on Europe comments

NEW YORK (Reuters) - U.S. stock index futures fell on Monday after the market's best two-week run since 2009 as Germany's finance minister said a forthcoming European summit would not yield a definitive solution to the region's debt crisis.

S&P 500 futures fell 1.8 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dropped 21 points, and Nasdaq 100 futures were off 1.75 points.

Just a random thoughts in trading

How to become a trader (or investor) in the stock market is a long process. Patience and commitment to learning takes time if not takes years. But the opportunities that the market offers are unlimited.

Having a passion and the love of what you do in every task play an important role, not only in trading but also in any career.

By having a goal and a vision to learn how the market works is the first step to become a trader.

But how to trade the market(s) is quite the most relevant. It is not what you trade, it is how you trade.

It is so simple to trade the market but it's not that easy, especially when your hard earned money is at risk.

If you're not used to losing money, it will be hard to be an investor or a trader.

Traders/investors become successful by losing, they learn their lessons from their mistakes.

As you go along with your learning through the years you will become accustomed to the market and once you find your niche in the market, you're on your way to become successful.

Discipline and persistence should go hand in hand in your journey. The market is a destination.

In trading, you don't need to master everything.

Find one idea, tweak it, master it and implement it in actual trading is the best way to learn how to become a trader.

Practicing one skill in trading and have your own idea and understanding about the market is the most important.

No need to emulate how great traders conduct their trades, but gather their ideas and form our own ways or ideas based from theirs is best way to trade successfully.

The market (YM) is descending as of this moment from the Globex trading.

A not so good news that is coming from Europe.

Earlier in the trading, the market is going upwards.

Let's see in the regular trading if it stay idle/sideways.