UBS Rogue Trader Loses $2 Billion In Unauthorized Trades

PolygamousRanchKid writes with this snippet from Reuters that sounds like a ready-made movie script: "Switzerland's UBS said on Thursday it had discovered unauthorized trading by a trader in its investment bank had caused a loss of some $2 billion. 'The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion,' the bank said in a brief statement just before the stock market opened." Asks the RanchKid: "I wonder how this will reopen the debate about the role of computer systems in the trading and the safeguards that are supposed to protect against these risks. But if microseconds mean millions in trading ... who has time for checks?"

Comments

Re:Digital money

[infodragon]

This was a trader, not HFT. He was manually calling in trades, either through a computerized system or through UBS's trading desk. The money was lost over a period of time in which he was probably exploiting loopholes in the controls of UBS. It's really disturbing seeing the trend against HFT when there is no evidence to show how it's being perceived. The flash crash last year was not caused to to HFT but due to a fund selling $4.1bn in E-Mini S&P futures.

From Wikipedia...

http://en.wikipedia.org/wiki/2010_Flash_Crash

The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral,"[10] and detailed how a large mutual fund firm selling an unusually large number of E-Mini S&P 500 contracts first exhausted available buyers, and then how high-frequency traders (HFT) started aggressively selling, accelerating the effect of the mutual fund's selling and contributing to the sharp price declines that day.

Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.

"a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position."

--- end quoting

I just roll my eyes... "portrayed a market so fragmented and fragile that a single large trade could..." It was a sell order for $4.1bn let me type that out... $4,100,000,000. Anybody have any idea what that does to available liquidity? No time in the history of the US markets could they have withstood this type of hit. HFTs provided liquidity during that time, higher spreads but without the HFTs the bottom would have fallen out. The drop would have been MUCH MUCH worse.

Right now HFTs are the target of a smear campaign by the SEC, it's a scapegoat. HFTs almost uniformly lost their butts that day. Read between the lines and stop drinking the Kool-Aid.

Two more things I'll hold your hands on... a large FUNDAMENTAL trader, this means somebody who trades on fundamentals not technical analysis, which is critical to HFT, initiated a trade for 75K contracts. HFTs passed that around for a volume of 27K almost 1/3 of that... So if you try to take the worst slant on that they provided liquidity to 1/3 of the order that started this. hmmm... what if HFTs weren't trading that day... others would have had to absorb over 33% of that hit. The result, Armageddon!

Sometimes I don't know why I try... I guess the Kool-Aid is too tempting.