Market ripples
Jan. 25th, 2008 08:34 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksThere have been some entertaining bullshit snippets already in the SocGen scandal. The first was when Christian Noyer, governor of the Banque de France, showed why the word sangfroid is French. He said that he wasn't worried about confidence, and that this was a "fraud of genius".
Yeah, right. This is a junior ex back-office donk who earned about £60,000 in 2006. I think that the cleaners in Citigroup investment banking earn more than that.
Secondly, SocGen insisted that its unwinding of positions had nothing to do with the market collapse early this week. It noted that the markets had begun to fall before it started unwinding its positions and claimed that it unwound in an orderly fashion.
Well, yes, but this a bit disingenuous.
SocGen was actually only loking at a trading loss of €1.5bn on Fridaty night. So how did it manage to turn this into a loss almost three times as big?
It claimed that it could not "in the interests of shareholders" keep the naked long positions open. Perhaps, but one could argue that, if the closing of the positions is going to cost you upwards of €3.3bn, it wasn't much in the interests of shareholders to close them out that quickly either. I'm not saying that the position of the SocGen bosses was easy (there are disclosure rules at work here as well, I suspect, although I'm not a compliance expert), but the solution this week appears to have exacerbated an already horrible situation.
So, did the SocGen "unwind" impact the markets? SocGen says no; I say yes.
Imagine that you are a market maker in Equity index futures. The market's fallen a bit from Friday night so you open up about 50 points lower for your March future. The phone rings.
"Hello"
"Your March FTSE future price please" says a voice with a French accent.
"Er, 5700-5750" he says, anticipating a normal Monday trade of a grand a point or something.
"I would like to sell at £5m a point please".
"Oh".
And then another market maker takes another call, and that one's a big sell order as well.
Next thing you know, the entire market is aware that someone in France is thwacking in massive short orders on Equity index futures.
You now get the unusual tail-wagging-the-dog scenario. Rather than the index representing the performance of the constituent equities, the equities start to represent the falling index. Because one way to hedge your position, if you can't get the money on in index bets, is to do so with the underlying equities.
All of this makes a lot of sense and would explain the really mad volatility I was seeing on Tuesday in particular. Other factors were obviously in play (particularly in the US, just back from holiday), but I'm sure that SocGen trading had a significant effect.
++++++++++++++++
I normally treat any parliamentary inquiries into business matters with the contempt that they deserve, but I see that an inquiry into the Northern Rock affair is going to recommend that Alistair Darling reconsider giving extra powers to the FSA, given the extent to which the FSA fucked up over Northern Rock.
As to Conservatives have rightly observed, the current EU legislation on disclosure is fine for companies that make toys, but is no good for banks.
The extent to which a government department (the Treasury) and a collection of "I can't make it in private enterprise" regulators at the FSA ballsed this up defies description. It's rather sad that the BoE has to take some flak as well, because at least the BoE knew what it wanted to do (a non-publicised liquidity injection), only to realize that it could no longer do so under EU legislation on disclosure and state support for failing industries -- legislation which the Treasury and Euoprean counterparts did nothing to block. The entire Northern Rock fiasco was, in a sense, another example of the law of unintended consequences.
++++++++++++
I think my tolerance for losses at the $200 buy-in level is about a grand. Certainly that was the size of the downswing before I decided that I needed to regroup some confidence at $100. Ridiculously, my stats for the month show a win rate of 4.95 PT BBB at $200 and 5.08 PT BB at $100. But a blip of a downswing is enough to make me a bit worried. I certainly made what felt like a bad error with AA on the turn when we were both deepstacked (he had led out from the blind on a flop of T62 two hearts after defending a 4x raise from the big blind). From that point on I just fucked up on flop and turn. I raised him on the turn when Jh appeared, and he reraised all-in. I'd managed to put myself in an awful spot, with an overpair and a draw to the nut flush against what I suspected was a made flush with a suited connector, or maybe three Jacks, but just might be an overpair with a heart. That was really when I decided to move back down for a week or so.)
I had expected this feeling to happen at a $1K downswing, so I'm not overly concerned. As time goes on you build more and more resistance to downswings. Six years ago a $20 loss was a disaster at 50c-$1 limit.
The other "plus" for me is that, even if you aren't winning at the higher level, you are learning. I think that midweek $200 at Party is just a bit too tough. Very few weak spots to exploit. I managed 200 hands for a $5 profit, but there seemed little prospect of easy money.
I may restrict my playing on Party to weekends, where my numbers look much nicer.
On the IP Network I'm fairly confident that I am a winner at $200, but the volatility is about 2.5x that at $100, and that still leaves me feeling a bit uncomfortable. I'll just rebuild the bankroll to previous levels (plus a bit more) and then move back up.
It's strange, but after a couple of weeks of running well, if you win $40 you go "paahh". But if you have his an eight-hundred buck fall over three days, and are $120 going into the session, ending the day 40 bucks up feels like a victory.
Oh, and I complete on the flat downstairs today. What a fucking great time to re-emerge as a property magnate....
__________
Yeah, right. This is a junior ex back-office donk who earned about £60,000 in 2006. I think that the cleaners in Citigroup investment banking earn more than that.
Secondly, SocGen insisted that its unwinding of positions had nothing to do with the market collapse early this week. It noted that the markets had begun to fall before it started unwinding its positions and claimed that it unwound in an orderly fashion.
Well, yes, but this a bit disingenuous.
SocGen was actually only loking at a trading loss of €1.5bn on Fridaty night. So how did it manage to turn this into a loss almost three times as big?
It claimed that it could not "in the interests of shareholders" keep the naked long positions open. Perhaps, but one could argue that, if the closing of the positions is going to cost you upwards of €3.3bn, it wasn't much in the interests of shareholders to close them out that quickly either. I'm not saying that the position of the SocGen bosses was easy (there are disclosure rules at work here as well, I suspect, although I'm not a compliance expert), but the solution this week appears to have exacerbated an already horrible situation.
So, did the SocGen "unwind" impact the markets? SocGen says no; I say yes.
Imagine that you are a market maker in Equity index futures. The market's fallen a bit from Friday night so you open up about 50 points lower for your March future. The phone rings.
"Hello"
"Your March FTSE future price please" says a voice with a French accent.
"Er, 5700-5750" he says, anticipating a normal Monday trade of a grand a point or something.
"I would like to sell at £5m a point please".
"Oh".
And then another market maker takes another call, and that one's a big sell order as well.
Next thing you know, the entire market is aware that someone in France is thwacking in massive short orders on Equity index futures.
You now get the unusual tail-wagging-the-dog scenario. Rather than the index representing the performance of the constituent equities, the equities start to represent the falling index. Because one way to hedge your position, if you can't get the money on in index bets, is to do so with the underlying equities.
All of this makes a lot of sense and would explain the really mad volatility I was seeing on Tuesday in particular. Other factors were obviously in play (particularly in the US, just back from holiday), but I'm sure that SocGen trading had a significant effect.
++++++++++++++++
I normally treat any parliamentary inquiries into business matters with the contempt that they deserve, but I see that an inquiry into the Northern Rock affair is going to recommend that Alistair Darling reconsider giving extra powers to the FSA, given the extent to which the FSA fucked up over Northern Rock.
As to Conservatives have rightly observed, the current EU legislation on disclosure is fine for companies that make toys, but is no good for banks.
The extent to which a government department (the Treasury) and a collection of "I can't make it in private enterprise" regulators at the FSA ballsed this up defies description. It's rather sad that the BoE has to take some flak as well, because at least the BoE knew what it wanted to do (a non-publicised liquidity injection), only to realize that it could no longer do so under EU legislation on disclosure and state support for failing industries -- legislation which the Treasury and Euoprean counterparts did nothing to block. The entire Northern Rock fiasco was, in a sense, another example of the law of unintended consequences.
++++++++++++
I think my tolerance for losses at the $200 buy-in level is about a grand. Certainly that was the size of the downswing before I decided that I needed to regroup some confidence at $100. Ridiculously, my stats for the month show a win rate of 4.95 PT BBB at $200 and 5.08 PT BB at $100. But a blip of a downswing is enough to make me a bit worried. I certainly made what felt like a bad error with AA on the turn when we were both deepstacked (he had led out from the blind on a flop of T62 two hearts after defending a 4x raise from the big blind). From that point on I just fucked up on flop and turn. I raised him on the turn when Jh appeared, and he reraised all-in. I'd managed to put myself in an awful spot, with an overpair and a draw to the nut flush against what I suspected was a made flush with a suited connector, or maybe three Jacks, but just might be an overpair with a heart. That was really when I decided to move back down for a week or so.)
I had expected this feeling to happen at a $1K downswing, so I'm not overly concerned. As time goes on you build more and more resistance to downswings. Six years ago a $20 loss was a disaster at 50c-$1 limit.
The other "plus" for me is that, even if you aren't winning at the higher level, you are learning. I think that midweek $200 at Party is just a bit too tough. Very few weak spots to exploit. I managed 200 hands for a $5 profit, but there seemed little prospect of easy money.
I may restrict my playing on Party to weekends, where my numbers look much nicer.
On the IP Network I'm fairly confident that I am a winner at $200, but the volatility is about 2.5x that at $100, and that still leaves me feeling a bit uncomfortable. I'll just rebuild the bankroll to previous levels (plus a bit more) and then move back up.
It's strange, but after a couple of weeks of running well, if you win $40 you go "paahh". But if you have his an eight-hundred buck fall over three days, and are $120 going into the session, ending the day 40 bucks up feels like a victory.
Oh, and I complete on the flat downstairs today. What a fucking great time to re-emerge as a property magnate....
__________
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no subject
Date: 2008-01-25 09:37 am (UTC)The general feeling here is that there's more (much much more) to this than meets the eye. I don't care how much of a "genius" the guy was at hiding positions internally, there is still a requirement to post collateral with a futures clearer to cover margin requirements. The rate varies, but I'd guess it would in the range of 5-10% of notional value. At the lower rate, SG would still have had to place €2.5bn in cash or (more likely) high-grade securities with the clearing house. You'd think someone would have noticed, wouldn't you?
On the other hand, if their control systems are anything similar in quality to the SG "system" I have to use every morning, then it's a wonder they discovered the problem at all.
no subject
Date: 2008-01-25 12:01 pm (UTC)Certainly seems a coincidence, no-one quite new why the market paniced after-all. You've got to wonder when the position would have expired.
f.n.
no subject
Date: 2008-01-28 05:28 am (UTC)