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UBS and THE Big Trade?
By thetrader.se
In order to “loose” 2 bln USD, you need to take quite big positions. While UBS is not saying anything, the “bet” must be in a fairly liquid product, and if not “hidden” below the desk, it is almost impossible to loose it on Equities Trading.
Maybe the trade was an extremely big Vega position on the CHF/EUR. A long Vega position seemed like a rather intelligent trade only some days ago, before the SNB announced to “peg” the CHF.
By doing that, volatility on CHF collapsed to virtually zero. Suddenly a winning smart trade, turned out to a nightmare, when CHF all of a sudden became “pegged”. There are very few, if any, Risk Matrixes capturing this kind of scenario, because it does not happen. This is an event outside any Risk Managers stress test. This is a Black Swan event for the holder of Volatility, and the biggest ironi, such a trade would have been perfectly positioned for the turmoil in the Financial Markets. A Black Swan is not always a Black Swan.
Below 30 day chart of the CHF/EUR. Note the totally vanished vol in the pair. If this was the trade or not is to be seen, but this is a possible senario, given the liquidity in the currency market.
The Alleged Rogue Trader’s Facebook Update on the 6th of Sep;
Mr Adoboli’s last update to his Facebook page, dated September 6, simply reads “Need a miracle”.
….it just might be the above trade that caused the loss, as SNB “pegged” the CHF on the 6th of Sep…
For a summary of this subject in today's press click here. Maybe the Swiss got screwed by the Swiss?
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2Bil is a lot of money, however it is easy to compute how he may have acheived that loss. Currencies are generally $1000 per penny movement, per contract traded. Given the massive move in CHF and the details of the story, odds are high this is what caused his demise.
So if you are long or short 1 contract and it moves 1c, you make or lose 1k. On the CHF, it moved 10c in an instant - no stop or any other method would save you from that move. So anyone on the wrong side would incur an instant $10,000 per contract loss. To lose $2bil, divide that by 10,000, you come up with 200,000 contracts. Odds are very high if he was in that many contracts management and risk new about it. Even a 1c move would be $200,000,000 gain or loss. Therefore, odds are low he had this kind of position. Additionally such a massive position would be difficult to put on without significanly moving the market in the short term - 200,000 contracts is $20bil notional for a currency -not a small amount.
This is just a standard, plain vanilla bet. There are other ways you can bet even more using leverage with derivatives which is undoubtedly the way he was able to lose that much money.
This video should get America's hopes up...
American Debt Crisis - A Warning To Millions Of Americans
Did he not get his bonus after this. Surely that's not fair!
the article makes very much sense to me. the official version of UBS implicates that four internal security mechanisms didn't work. this wouldnt be a good story, the criminal black trader serves way better as an explanation. timing of the comment on AK's FBpage, timing of SNB intervention and the short communications of UBS speak definitly for an 'accident' in CHF/EUR.
if this idea spreads out in switzerland, the problems will escalate enormous for UBS at its homebase. swiss government & SNB rescued UBS during the loan crisis some years ago with huge amounts, the citizens (who took the risk) didn't like that very much. actually switzerlands (real) economy faces huge problems because of the strong CHF. politicians and media blamed traders and hedge-funds for that. if it turns out that the same bank that was rescued by government was betting against swiss economy... then zurich burns. so far people were revolting when police didn't allow them to do party in public spaces... if there is a rational behind protests which are partially backed up by population and polity, there will be a significant shift in the swiss political and economic system. elections in switzerland come close, so politics wouldn't be able to ignore the populations frustration and appearance social movements calling for a change.
yesterday, when the message about the loss was published, at the same time swiss parliament was deliberating about splitting the investment banking from the big banks to reduce the systemic risk for swiss economy. the news was integrated in the debate immediatly.
and the bigger context: a few days ago the american government was asking again for data of US-clients on swiss banks, CSG was targeted mainly, but many others are on the list. swiss government tries to reduce the damage, but OECD already started thinking louldly that it might be better to play with the muscles like the US does instead of talking about contracts against tax-criminals.
alltogether, this event might function like a key that fits perfectly to unleash radical shifts in switzerland and in the regulation of UBS and CSG.
Another reason to officially limit position sizes across the board? In this day and age, surely it's not impossible to 'watermark' trades, so that any limits would have to be adhered to.
The only thing this episode highlights, is the greed culture that exists in all the trading desks around the world.
If Adoboli was on the ETF desk as reported, why would he be trading CHFEUR vega?
Delta One desks use algorithmic programs and automated trading, so position reporting is virtually instantaneous and visible to the position and operational risk management as any limit breach should be flagged up. Like SocGen's Kerviel claimed, management may have told the risk limit monitoring manager to look the other way for certain star traders.
Maybe another institution is involved who warehoused accumulated positions outside of UBS to disguise the source of the activity from the market.
Which ever way you look at it, UBS claims to have some of the most sophisticated trading and risk management systems born out of the SBC / O'Connor joint business starting in 1990. Regardless of what Adoboli may or may not have done, it is a damning indictment of UBS's risk management systems that they missed what must have been a massive short volatility position.
Pride before a fall
JF: Interesting hypothesis about trades being warehoused by a third party, but I think its unlikely to have gone under the rader this way. Any third party (clearer, broker - whatever) would have been reporting daily (at minimum) to UBS what it was holding on their account, and SCREAMING for variation margin well before the loss got to 1% of 2Billion.
To me this looks like a very big correlation trade made on some fataly flawed modelling premise and gone horrible. Risk that did not look like risk, until - it was.
But whatever the reason, I dont buy the rogue trader scenario. More likely to be a string of errors and false assumptions made by groupthink and hubris.
Delta1 desks vary in their remit and function from shop to shop and indeed trader to trader, but this guy had a lot of people above and around him who WOULD have known what he was doing.
On a related matter, the MSM has just revealed that Rick Perry got a "D" in economics at A&M. Unlike all those brilliant Harvard PhD's who have spent the last 30 years destroying the US economy.
Is that the same Rick Perry who calls for small government, but recently was ultra quick to call upon the Government to help out, after the winds blew through?
Yeah, right!
His FB page is not there any more. I suspect this hypothesis is correct. Karl Denninger wrote on this as soon as it happened that there will be come with gigantic losses. Surprising it would be a Swiss Bank!
Your idea is strongly hinted at in the top paragraph from a story Bloomberg put out about four hours after you posted here on ZH:
As Switzerland’s central bank imposed a limit on the franc’s appreciation against the euro on Sept. 6, UBS AG (UBSN) trader Kweku Adoboli’s Facebook profile had a plea for his friends: “Need a miracle.”
But the article doesn't go any further with the idea.
might be time for late night
gold and silver thread...
The question is why is a 31 year old put in a position where he feels he has to bet the ranch to save the town. Naturally the City Councilmen are all cowering behind the saloon.
Exactly!
But his biggest crime was not that he bet $2 Billion, his biggest crime was that he lost!
If he'd won we would never have heard about it and he'd have received a big fat bonus.
Switzerland has become a less populous Austria in one fell swoop.
Good guess. A big bullish-on-the-franc options trade does seem like the simplest explanation here.
Doubtless, if he had made $2 billion, they would have made him a hero, given him a giant bonus and his managers would have got even bigger bonuses.
These guys ought to read the books by my homonym - it would have saved them big money.
Lemon socialism at its very worst. The guy put $2bn on red, and lost.
Lose vs. Loose:
http://www.ross.net/notes/loose.shtml
+10
Fuck I hate that shit-- and it seems to be happening more and more every year.
I actually give this guy a bit of slack, though-- zee Englee is obviously not his native tongue.
Adoboli has Ghanaian origins.
He was Head Boy of his Quaker run school in Yorkshire, England and graduated from The University of Nottingham in the UK in 2003.
He spoke English as a native.
To suggest somebody with poor communication skills would be given such a position of responsibility at an international bank is risable.
This is more a failure of management, who will now try to deflect all the blame, just like SocGen and Kerviel
Exactly. If there's one thing we learned from 2008 it's that none of these large institutions have any idea what's going on on there various trade desks. Still the case today.
At first I thought it even looked like a swan, but looking closer, that chart is clearly a camel with a crocodile head.
In fairness, when ZH declared "wtf" are the Swiss thinking you kinda gotta think that a U-B-Switzerland should be able to depend on staying strong... Of course there is no counting for morons...those being the ones that pegged the franc to the euro.
I have an idea ... Let's tie our dinghy to the titanic.
"dinghy to the Titanic" is Govt intervention in a nutshell... you'd think the SNB would have stopped pissing away $Billions trying to intervene in a currency market but no, these terminal twats have to take it to all-out suicide stage! ...and the public are always left to bailout these market intervention fukheds or drown
forget arresting a UBS trader over a piddly $2bn, arrest the entire SNB Board for losing that every month!!! ...before they sink the country
You think they lost all of that 2 billion? Maybe some small fraction lets say one percent 20, million found its way into someones bank account, and they figured oh well whos gonna miss a measley 20 million, after all this money was created out of thin air, and we used USURY to charge interest for it, and if we lose it no big deal because we loaned it into existence in the first place, and besides, the Bernanke wil just do the currency swap thing again lilke last time for a cool trillion, with the ECB or others and they will give us more money out of thin air, and we will charge interest on this money to the govts (I mean central banks) who created it out of thin air and gave it to us and we charged the American People ( I mean the govt interest), on the money which we will in turn use USURY and charge the american people interest on money that we never had but can collect hard assets from people with it. the circle jerk continues. SHUT DOWN THE SCAM, GOVERNMENTS DON'T NEED A CENTRAL BANK TO CHARGE THEM INTEREST, THE GOVERNMENT SHOULD CREATE THE MONEY FOR ASSET BASED LOANS NOT DEBT BASE, AND THE GOVTS SHOULD CHARGE THE BANKS INTEREST. END USURY NOW.
Right up there with Obama's Vega solar trade
Mr. Adoboli couldn't be reached for comment....
The miracle is that this trader can take on such a huge position with so much downside without being detected. BOLLOCKS!! It's not $200k or $2m. It's $2 BILLION!! MY GOD! You mean with all the million-dollar computers and systems and risk managers, it still can't detect a runaway trade? BULLS**T!! UBS must have been naughty and now seeks a scapegoat. How can they not know of the trade? Every end of day we get a report on ALL trades. UBS managers must be either lazy, stupid or just plain forgetful. I vote the all three. What happened to Swiss precision? Partying around the slopes perhaps and/ or in the pub perhaps?
Just imagine, after the string of rougue trades that costs billions and banks to fall, the lesson has yet to plant firmly in their thick heads. Good for you TBTF!!!!!!
+ 88888 error account
Should have been +4444 account (4 in chinese sounds similar to die), 8 sounds similar to prosperity.
666666 sounds more like it!
Mr. Adoboli deserves a bit of credit here. After all, by age 31, he managed to get himself into a position where he could incur a multi-billion dollar gambling loss. Truly rarified air. Keep your head up Kweku, and remember:
If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on";
If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run -
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son!
f7ck yeah!!!!
The double edged sword of government and central bank intervention. It can do wonders to prop up your balance sheet, provide liquidity and profits, even save you from bankruptcy. But, it can wreak havoc on your risk models and management practices, which in many cases make little allowance for such actions.
Watching these mega banks try to convince everyone they have things all under control is increasingly like watching Lindsay Lohan and Charlie Sheen try to do the same. RIP Amy Winehouse, you and the rest of us know the painful truth.
The problem with a standardized test to measure risk is once the test becomes known, everything will be gamed to satisfy the test.
From what i have read, he sounds like a nice guy, likeable, but the longer the duration that you dip your toe in the market under those kinds of conditions, the more certain you are to get hammered - he is not totally blameless either, and this was no black swan, he should have known the SNB were approaching the end of their tether. If it was a vega position(and it was something exotic, because an American bank took the other side), then its a classic case of picking up pennies in front of a steam roller...steam roller 1, UBS 0
The Swiss most definitely screwed themselves. Because like all blackswan events, it's really hard to see what is coming that will effect the whole system.
Hats off to the kid from Ghana who could access the liquidity to make that trade!
He lost big. UBS surely made BIGGER over the years by scamming millions of investors.
That's my whole argument. The entire financial system is garbage. The concept of leverage and virtually creating money out of thin air with fancy cute risk models is garbage!
It will implode or it will get regulated to a level where all the paper millionaires and billionaires will have to line-up for a meal.
End of story.
Fight Club / Project Mayhem.
His name was Kweku Adoboli.
as I posted before, the black ghana man was left out of the pre-information SNB memos, sent to UBS the day before on monday.
But there must be more to the story, than a 31 year old trader, screwing up 2 billion CHF. UBS is known for bad risk management, since they employed Mr. brilliant David Solo in the early 00.
Mr. Adoboli goes to jail, while Mr. brilliant Marcel Ospel, Ex CEO of UBS, although socially banned from kronenhalle in zurich, should have received 5 years in a white collar 5 star prison in Switzerland, for his reckless I-banking MGMT behaviour, whose bailout of UBS has cost every swiss taxpayer CHF 30'000, is still using his UBS perks, flying netjet around the world, while smoking his Marlboro Lights on the UBS financed chartered private planes.
Sorry, i transferred back to the second stage of denial called anger, according to the kuebler ross model
I'm thinking he was maybe short a shitload of OTM eurchf calls written over a period of maybe a few weeks to a month. Looked like easy money, capturing premium.
Worked until it didn't, and his size made it virtually impossible to cover in any timely manner.
He'll cut a deal, do 5 yrs., write a book like Nick Leeson did after he blew up Barings Bank, and be running a hedge fund out of Bermuda after the dust settles.
A 5-year sentence seems harsh. Didn't he, after all, make us feel all warm and fuzzy inside this morning? I'd say this guy deserves a medal!
How it would compare to Soros and the British Pound?
Just FYI today was the beginning of the discussions in the Swiss parliament on a new law to tackle "to big to fail" banks ... Coincidence ?
he couldve wrote a ton of o/n or 1wk otm chf puts in order to collect any sort of decent prem. a 10 big fig move in a day is unheard of in fx....well it WAS unheard of.
regardless, ubs had no VaR? no position limits...especially on a delta one desk? (regardless if the trade had been working for a whole month) seems like the managers whos daddies got them their jobs fucked up royally and decided to blame it on the kid who busted his ass in middle office and got promoted only to cover their own worthless asses.
It's okay - none of it's real money anyway. They'll just make more.
Yep. One has to presume UBS, the largest Swiss bank, has a rather cozy relationship with the Swiss government, particularly given the role of banking in the nation's history. This $2 billion loss was because of a government action. My guess is Swiss authorities have already indicated that UBS will be made whole at the end of the day. However, they had to take down the black man. They are bankster elitists after all.
Wrong. It's real when Swiss taxpayers receive the bill. On a related matter, the MSM has just revealed that Rick Perry got a "D" in economics at A&M. Unlike all those brilliant Harvard PhD's who have spent the last 30 years destroying the US economy.
What grade did Obama get? Has anybody looked at his college records???