The great RBS Discounter swindle
RBS is selling short puts as expensive special products.
The old profession of market making may be dead, according to All Options’ spokesman, but with a little creativity it’s fairly easy for banks to invent something new. Let’s have a small look what Royal Bank of Scotland is bringing us for fancy structured products.
The rocket scientists at RBS have invented a basic option construction (“short atm put”) and labelled it with a fancy name (“discounter”). As of October 4th, they are actually selling this structured product to the retail investors. The marketing department didn’t only create the name Discounter, but also the wonderful slogan (“buy shares against a discounted price”). The product isn’t just comparable with a short put position, it is exactly the same thing. When the underlying share price goes up, you pocket the short put premium. If the prices drop, you’ll end up with buying the shares (and still get the option premium of course). You could also call it covered call writing.
First of all, the retail investors are fooled into buying repackaged crap – there’s an adequate Dutch saying for that (selling turnips as lemons). Apart from trying to sell retail investors ordinary short puts, this RBS product is daylight robbery. They are charging an outrageous 2 percent fee per year, for basically nothing. Retail investors hand over their hard earned cash into the greedy hands of RBS, and RBS is charging them for it. Selling a bond to the bank and having to pay for it. If RBS goes bankrupt, you’ll lose a part of your investment. Nothing wrong with structured products, you always end up overpaying but as long as it’s tricky or impossible to do-it-yourself it’s fine with me. This one, however, is a bridge too far.
We’ve recently had a lot of attention for financial institutions cheating on their customers, but they haven’t learned their lesson and prove unreliable. Cheating clients and getting away with it, at least for the time being. Investors should just buy the shares, and sell the at-the-money call if they wish to replicate this product. Stay away from the “discount” swindle.
In the mean time, all market makers should try to get rid of their premium. The market will continue to float sideways, according to RBS markets chief Jean-Paul van Oudheusden (link, Dutch). Sure.
Are those discount certificates listed in Euronext?
Yep, but I guess you can’t short them.
u can short them if u can borrow it from somebody ; )
banks have doing this structured product shit for more than a decade .. get over it .. hopefully after the credit bubble bursting, people dont have any risk capital which can slowly bleed over to structured trading books ..
to be honest i have seen a Physics PhDs/Quant investing in this shit .. i just gave up explaining to anybody after that ..
if a retail customer buys this product, so ends up selling a Put to RBS, RBS is thus long premium, correct?? And they say people should get rid of their premium??? Mmmmm, me don’t understand….
Adage on Wallstreet: You dress up the pig before you sell it.
Big news is that the frenchman Jerome Kerviel now owes 4.9bn euros to SocGen!
Guess he has to sell a lot of premiums from now on…
warrants are even worse. you pay 5+ vol premium over the eto market for counterparty risk. hilarious.
4.9bn euro, that’s more than my bonus this year!
sorry to hear that
morning…like anon number 3 said: this has been out for about 15 years and have been trading on Euwax and SWX forever….the big liquid names are usually tightly priced and sometimes they are a little slow to pull back their vols so no so stupid after all. i guess reverse converts are also stupid?
guess they want to show a new product range before Goldman Sachs starts turbos with ABN Amro
all structured products are meant to bleed the investors, slowly or in one go .. the trading book takes a juicy margin to begin with, manages risk with little bit going towards hedging cost thru the life and since derivatives dont create the money out of thin air, so the str trading book makes money on an avg at the cost of the suckers taking the other side of derivatives bet .. yes its very stupid to invest in the structured pdts or options including recons which are just slightly fancier version of selling the downside vega..
Don’t forget the profit when the client comes back to sell the product back to you! Also a great source for profits!!
ya thats another hilarious aspect .. the fucking prospectus says assured liquidity in secondary markets .. who the hell is going to make a market in that shit str pdt, the dealer of course .. and well he’s going to take atleast another 2 points if u want to sell the paper back .. wat a day light robbery …
another way to fuck the client is the repeat business .. which i just realised thinking abt the short lived Recons .. they float it every few months and keep its life short on sweet .. buy both downside vega and gamma at really cheap levels and let the client go to hell in a bearish market .. of course that wasnt the case with the power reverse dual blah blah in Japan where the dealers got stuck with str paper lasting for 30 years with exotic risk having very illiquid vanilla replication/hedge.. many dealers auctioned there books off when the repeat biz dried up after first few years of saturating the market with this paper ..
and yes they were pretty stupid to invest in .. even though they are very ‘sophisticated’ and rather impossible to risk manage ..
Wallstreet 3:
Jerome Kerviel will come out of jail, write a book. Sell a ton of copies and payback Socgen.
Used to work for structured products for banks a couple of years ago. The way it worked at that time: Hire interns, let them research what hot topics are discussed, mostly amongst retail investors. Find out the themes, like gold, emerging market etc. . Then find out what fancy structures other banks have created lately and try to make something even more fancy where pay out conditions are connected to a lot of ifs and digital events. Once this set up is created its all send to be priced, now the quants find the cheapest structure to replicate this. If you get the structure for lets say 97% is going to go into realization. Then the marketing machinery kicks in, and a lot of marketing is done and sold to banks with access to the retail market for 99%. The retail banks again, supplied by the original selling bank with a bunch of marketing material sells the structure to the innocent client for 101.5%. And then it goes on as described above. The market making is only done by the bank selling the product, liquid titels indeed have tight spread, but vol is usually higher and gets updated twice a day not more. So there is quiete some money to make in there. Only arguement to buy this stuff as retail customer is that there are even simple stuctures out there u do not have access to as normal person. But for those people u would not need the marketing and the fancy products because they know what they are doing. There was at my time a product called the memory, it has 3 barriers, every one could trigger at some point an additional pay out but if not it had the memory that at the next trigger date it would look back if conditions know are met to get the extra pay out, hence the memory …
Those markets are also bit dried out by know, and also by then, when I worked there, this products and their popularity where heavly dependend on the country. There where countries where those products where booming and other where there was no interest.
is this db ?
the funniest were ur old grandmas buying snowballs from the Deutsche postbanks .. wat a ripoff ..
ur memory shit looks some one buying minor digital option and cross subsidizing it much much more by selling related path dependent option .. nice!
Very old trick. The bank is buying puts with a discount. In the 90’s when the clickfunds were all booming, they did the same.
What I hate most is the stupid quotes bank give (often only twice a day) to buy and sell “house funds”. No transparancy or whatsoever. Funny that every so called “appreciated client” always buysat the high and sells at the low of that day. THEFT!
the level of theft is horrible .. while dealing with ADRs, we had to get pound dividend paid out to the ADR holder in dollars, of course we used to get the lowest dollar posssible dividend by being quoted the worst cable of the day two days later.. hows that for hoodwinking ..
@ October 6th, 2010 at 10:15 pm
Hey Cees nice to have you on the forum. Perhaps your memory can also explain the brilliant trading you used to do on the floor at Wolbers………… ?
RBS is responding in the Quote.
http://www.quotenet.nl/biz/royal-bank-of-scotland-zwendelt-met-nieuw-product.php
(dutch)
haha moron from RBS.. u wanna replicate structure ur self, u shud go ahead do it .. what a dodo ..
why wud i wanna replicate an option structure unless i am a market maker, its too freaking expensive .. and if i am market maker, i wud not be really punting wud i ..
the main point remains u are taking too much margin for faciliating a very vanilla form of gambling ..
Van Oudheusden van RBS:
“De optiemarkt is ingewikkeld en je moet het opnemen tegen professionele beleggers. Van die 9% komt negen van de tien met verlies er uit.”
if the options market is so complex and competitive, why are poor retail investors being told to participate in it .. they pay too much fees to enter, more to leave and with no delta or vega hedges whatsoever .. oh yah, they dont need to participate, they can replicate it themselves !!!
http://www.bloomberg.com/news/2010-06-24/reverse-convertibles-draw-scrutiny-as-fees-exceed-highest-possible-yield.html
almost as nice as these reverse convertibles with fees higher than coupons, nice granny robbing.
Charging fees higher than the potential yield on a reverse convertible is “rare,” according to Durraj Tase, who supervised structured-note sales at U.S. Trust. Banks sold $460 million of the notes in the U.S. in May, with disclosed commissions and fees averaging 2 percent for six months, according to data compiled by Bloomberg.
“It seems inconceivable that the commission could be more than the potential return to clients,” said Tase, who is now a high-net-worth adviser with First Liberties Financial in New York. “If you are paying more fees than your potential return, as an adviser, I would not be able to suggest that note.”
Haha .. u think so dodo ..
[…] http://www.amsterdamtrader.com/2010/10/the-great-rbs-discounter-swindle.html […]
Typically like the reverse conbvertible in the past. Funny is that ABN amro had (has?) in it’s risk profile trading options as the most risky but reverse convertibles as less risky. I wonder how RBS classifies this product in terms of risk…
[…] overcharge for structured products- or options in disguise. One simple example is described by the Amsterdam Trader. […]
New topic, how is All Options Curacao doing? Is Martijn Nol still there?
I heard they will close All Options Curacao this summer
huh, is Allard gone?!
http://investing.businessweek.com/research/stocks/private/person.asp?personId=58798893&privcapId=45792654&previousCapId=45792654&previousTitle=All%20Options%20B.V.
sounds like Tibra/optiver style top executive giving up their CEO responsibilities .. optiver did it for finding better candidate whereas Tibra/AO seem to be doing because they are dysfunctional places to begin with ..