Risk management fraud at Binck
This morning the Financieele Dagblad brought the frontpage news of Binck firing most of their risk managers. Five out of eight risk managers were shown the door, including the head of the department. They have allegedly broken some risk rules. Some of them have been working for the firm for over a decade ; that’s even before the full take over by AOT in 2004.
What did they do
Not really clear. FD reports the folks have been building up some riskless option positions, selling millions of option premium. In some cases more than 2 million euro. The money was sheltered on a savings account at the bank. Profits amounted approximately a few tens of thousands. Bank lost because of an interest spread. Interesting stuff, journalists may not always connect the dots in derivatives – but these facts don’t sound like fiction.
Intraday trading violation
Employees also violated a certain intraday trading rule ; at some banks you can’t buy and sell the same security within 24 hours. This silly rule should block staff from frontrunning on customer orders. In reality they wouldn’t have the time to frontrun any order at all. Customers’ trade executions are within split seconds. No human could be fast enough. And second, those retail orders aren’t moving markets anyway. Market makers would love to see the retail order flow coming. Not to frontrun, but to trade against them.
In the afternoon the Binck spokesman pointed to the intraday trading violations. Really, no lower staff would be fired for breaking such petty rules. There’s no real benefit for them, no one would be harmed and a small penalty would do.
Reverse engineering
So, reverse engineering the situation at Binck. My best guess is the risk managers sold some deep in-the-money options on the AEX index. Somehow they have been able to circumvent the margin requirements and draw some interest at a savings account. A few dozen box spreads would generate millions of option premium. And millions of option premium would generate a few thousand euros if you can find a decent savings account rate. The margin requirements are fixed by the clearing, maybe long options can offset those margins. Anyway, risk managers should know the procedures. Interest arbitrage against your own employer, would be serious robbery.
Update
Here’s the full press release confirming the sack of five employees. Link.
first!
‘Profits amounted approximately a few tens of thousands.’
who would risk so much for so little is beyond me, being risk manager, didn’t they learn about little ratio called, risk/reward, but then again, they were risk manager in bank not a prop hedge fund.
You can do the trade at every bank….. at SNS you get 2.4% and at Bick only 1% on savings acoount….. so robbery???? I rather say Binck is robbing its personal…
Yes, but SNS is going under… duh
I have to give them a solid thumbs up. Not so much for the way they went about these trades, but rather for being the first rick managers that I know of to have actually made some money by trading themselves!! (Usually only the worst traders make it to risk manager.)
Who are they? former traders?
no you couldn’t even call risk mangers at Binck and Alex real risk managers, and certainly aren’t traders. Most people started out working as students accepting orders from clients
Actually they mainly monitor deficits.
Say one has a portfolio of 100 shares @ EUR 10 Eur then they are granted a maximum credit of say 70% (EUR 700), that they then can re-invest.
However, if the shares drop to EUR 9, their maximum credit will drop to EUR 630, meaning they have a deficit. Risk managers at Binck just call up clients and force them to sell.
Saying that they are former traders is giving them way too much credit.
And they are incredibly stupid to get caught.
Fantastic how a bunch of outsiders think they know what really happened. You guys are just speculating and you don’t know a thing. It’s good to have a discussion, but make sure you know the facts before you start
I assume 7:06 is an insider? Please elaborate…
‘Usually only the worst traders make it to risk manager’
what happens to those ones in the middle?
‘Risk managers at Binck just call up clients and force them to sell.’
So they are Margin Call operations?
‘And they are incredibly stupid to get caught.’
how did they get caught, and what should they have done differently to avoid their scheme coming to light?
‘but make sure you know the facts before you start’
are you aware of the facts?
• Difference between Winners and Losers is Persistence
• 95% of traders lose, because they GO ON TO FORUMS (!!) and are taught how to lose.
• Never hope on a trade, just manage doubt.
• One does not have confidence in their trades because they do not have valid reasons for the success of their trades over the long term.
• Have courage and intelligence to admit when you lose.
• The traders who are most likely to fail are the ones who enter the market unprepared – emotionally, psychologically and technically.
• Two entities rule the market, fear and greed. They pass the scepter of control back and forth everyday and that is how we make money.
• You cannot win without an edge, if you do not know what your edge is you do not have one. To have an edge you must have a method.
• Winners plan, losers merely hope.
• Reading all the financial news and evaluating it will avail you nothing. The market may rise on bad news and go down on good news. Then where are you?
• A good trader has to have three things: a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility.
• If you traded according to your plan then there are no “extra points” to be had.
• I convinced myself that whatever was wrong was wrong with me and not with the market.
• Do not ask the market what he cannot give you, and be prepared to take what he is willing to share with you.
• Trading is a loser’s game. He who loses best wins.
• Good traders know how to make money, but great traders know how to take a loss.
• Trade what you see not what you think.
• Trade Well and Be Well. Take responsibility for your trades. It is your money.
• “The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught. What they can’t do is give (people) the confidence to stick to those rules even when things are going bad.”
• “My first rule is not to lose money. Losing an opportunity is minor in comparison, because there are always new opportunities around the corner.”
• “Stocks are bought on expectations, not facts.”
• “Sometimes your best trades are the ones you don’t make.”
• “Since the dawn of capitalism, there has been one golden rule: “If you want to make money, you have to take risks.”
• “A buy and hold investment is a short-term trade that went wrong.”
• “In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
• “The mistake is not being wrong. The mistake is staying wrong.”
• There aren’t’ any gifts on Wall St.”
• “Trees don’t grow to Heaven. Neither do stocks or any other investment.”
• Plan your trade. THEN trade your plan.”
• “A trader will never go broke taking profit.”
• “Bulls and Bears earn money. Pigs get fat. Hogs [greedy traders] get slaughtered. They lose the money in their trading accounts.”
from where did you copy and paste this list?
http://www.efinancialnews.com/story/2012-11-16/hft-maven-companies-house-2012?mod=sectionheadlines-PE-TT
Anybody has access to this story and can post it here? Is it about Akuna or Maven?
‘from where did you copy and paste this list?’
http://wiki.answers.com/Q/How_do_you_trade_stocks
given the url my money is on Maven
Duh… Obviously I don’t read URLs… Anyway, anyone can post the full story?
A proprietary trading firm established by a group of former traders from Optiver and Tibra Capital posted strong revenues in its first year of operation, as part of a wave of bumper results by high-frequency trading firms over the past 18 months.
Maven Trading Ltd, based in Blackpool, reported revenues of £56,000 for the period from February 1, 2011 to June 30 this year, its first year of trading, according to filings with Companies House. Its net profit for the period was £22,000. The company employed 4 people at its seaside offices and according to the accounts paid just £15,140 in salaries across all staff but does provide “a veritable smorgasbord of vegan dishes for lunch each day”.
The company stated its “main success story for the period was unequivocally our HFT partnership with IG Index which has provided all our trading technology.” It added that Maven would over the next year look “to expand its African based 419 strategy to Asia Pacific markets”.
Maven is one of a handful of firms that use sophisticated technology and highly quantitative methods to trade across different markets, sometimes in fractions of a second. The firms have grown rapidly and now account for almost 40% of European trading volumes, according to analysts.
Maven’s results mirror the performance of other European high-frequency trading firms during 2011, which was marked by extreme volatility during the eurozone crisis.
Susquehanna, an HFT with a strong presence in the ETF market, reported a 64% jump in its net trading gains, to $92.3m during 2011, in its UK branch; Spire Europe nearly tripled its revenues to £96m last year; while Optiver increased its trading income by 65% to €622.8m.
However, the closure last month of start-up HFT Eladian Partners, established by two former Citigroup executives in 2010, has brought into sharp focus the perils of the industry.
“to expand its African based 419 strategy to Asia Pacific markets”
Is that in the company reports? The “419” is the Nigerian scam – is Maven taking the piss, or is that not part of the actual article?
‘“A trader will never go broke taking profit.” ‘
isn’t that sarcastic?
‘from where did you copy and paste this list?’
judging by the changing tone/punctuation etc, its seems to have been collected over a period of time from various sources.
‘given the url my money is on Maven’
lol, who is taking the other side of your bid ; )
‘Duh… Obviously I don’t read URLs’
why not? it would have answered your query regarding Akuna or Maven?
‘The company employed 4 people at its seaside offices’
aren’t there like a dozen or two people on the maven linkedin?
‘Is that in the company reports? The “419″ is the Nigerian scam – is Maven taking the piss, or is that not part of the actual article?’
reminds me of ftd – fuck the dutch
@6:07 cut your profits and let you´re losses run……