Rogue Trader
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Rogue Trader

Rogue Trader


Trading Features / Strategies from Simon Denham of Capital Spreads.



So, the on going saga of Soc Gen rogue trader, Jerome Kerviel, who’s given Nick Leeson a lesson (terrible pun, sorry Ed).

Here’s how we’ve covered it so far:

Rogue Trading, 2 Feb 08

Rogue trader loses €4.9 billion for French bank, Comment from IG Index

January wasn't a good month for banking stocks with many giants such as JPMorgan and UBS having to unveil more losses due to the sub-prime situation.

But the big banking news of the month focused on alleged rogue trader Jerome Kerviel and his leveraged positions at Societe Generale. The news broke towards the end of the month: Societe Generale, the second-largest French bank, said it had uncovered a massive fraud by one of its traders which resulted in a loss of €4.9 billion.

To put this in perspective, this was four times bigger than the losses incurred by our home-grown rogue Nick Leeson, which brought down Barings Bank in 1995.

On discovering the positions, which were leveraged trades designed to profit if stock indices rose, Societe Generale closed them out on Monday 21 January. As this was the day when European markets were in freefall this would not have helped the overall loss and the bank's selling would have added to the negative sentiment on the day.

The bank has said that Jerome Kerviel used his knowledge of its internal controls to hide his trades – although Kerviel has reportedly said that SocGen knew the risk he was taking. Even though he is alleged to have created fictional trades to balance out his positions for the bank's internal systems, some are wondering how the large exposures still went unnoticed. Presumably margin payments would have had to be met by the bank and what has proved puzzling to some is how these were not flagged by SocGen.

All of this, coupled with the weakness seen in stock markets across the board last month, meant that the Societe Generale share price dropped by 30% at its worst point in January and has left some of us thinking there are more facts yet to come out about this story.



The above comments do not constitute investment advice and neither IG Index nor Clean Financial accept any responsibility for any use that may be made of them.


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Rogue Trading, 25 Jan 08

Two huge pieces of news will dominate dealers minds today. The first being the incredible €5 billion loss created and hidden away by Jerome Kerviel and the second the $150 Billion stimulus package voted in by the US Senate.

Taken in order, the more you consider the extent of the fraud the more questions are raised. If we assume that the trader lost 10% of the absolute risk on the stock futures (and that is assuming he took the entire position at pretty much at the top of the market) then we are looking at total exposure of some €50bn. The bank has said that the contracts were in plain vanilla derivatives (generally this means a ratio of 1:1 risk). That means the dealer somehow managed to get the confirmations for the deals directed to him personally and not to the Soc Gen back office. We can assume that an audit team, as is normal practice, requested a list of open deals from a counterparty bank and discovered that the counterparty had a series of deals which were not represented on the Soc Gen books.

The statement from the bank that the risk had been sold off already might, to some extent, explain the extra-ordinary market action on Monday and Tuesday when in just two trading sessions the Dax dropped almost 1000 points (far more than any other index). Dax trading remains 500 points below the close last Friday whilst the FTSE is almost unchanged and the Cac only off a couple of hundred. The bank may have to answer questions about creating an artificial market as dealers who lost substantial sums over the period might feel rather aggrieved.


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Rogue Trading, 24 Jan 08

The sense of unreality has continued with the French Bank Societe Generale announcing that one of their dealers had committed the bank to positions that were now losing over 5 billion euros (that is 5,000,000,000 Euros). Even Nick Leeson cannot claim that level of hidden risk. The stock will no doubt plummet this morning but will probably also drag down others shares in the sector as investors worry about contagion.





The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


Capital Spreads » "With Capital Spreads you get all the normal
advantages of Spread Betting plus..." » read Capital Spreads review.




Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Rogue Trader' edited by DB, updated 31-Jan-08



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