Strange things are happening in the world of trading these days.
On one hand, you have Deutsche Bank's supposedly expert, professional traders making gargantuan bets, which exceed by 12 times the bank's daily VaR limit, only to watch the trade implode spectacularly, resulting in a daily loss in the hundreds of millions; at the same time, novice traders somehow accumulate multi-billion positions not knowing they are trading in a live account... and make millions in profits.
That's what happened to French trainee daytrader Harouna Traoré, who used a demonstration version of the Valbury Capital brokerage platform "to become familiar with the basics of trading", before eventually building up the courage to open a live, €20,000 account last summer for the occasional "real" trade.
This is when things got interesting: as the FT reports, shortly after opening the live account, he was practising trading at home on what he thought to be the demo version, placing massive, €1bn trades for European and US equity futures, before realizing that it was the live platform and he had run up a loss of more than $1 million.
Now he wouldn't be the first amateur trader to fall into a deep hole by trading without knowing what he was doing; however, we may be one of the very few who continued trading and managed to not only dig himself out of the hole, but to eventually build up an even bigger, $5 billion position - rapidly approaching Jerome Kerviel levels - in S&P futures while turning the original loss into a profit of more than €10 million!
“I could only think of my family,” said Traoré, who is married with two children. “I was stressed.”
And then, inexplicably, having made $10 million in profits - even though it was almost literally by throwing darts at a dartboard - he called Valbury several days later to explain what happened, at which point the brokerage told him he had breached his contract and his positions were “void and cancelled”.
One almost wonders if Valbury would have "voided and cancelled" the positions if Traore held a multi-million paper loss. Almost. Because with a profit on the books, what the brokerage effectively did was confiscate the funds.
As one would expect, the daytrader, who was recently fired by Reuters, was furious, and in January he sued the brokerage in French court, claiming breach of contract and negligence by the British brokerage and calling for it to pay him the €10m he says it owes him.
Valbury, which is owned by the eponymous Indonesian financial services group, denies any wrongdoing and is preparing to file its initial submission next week. It is expected to argue that Mr Traoré is not a consumer, but a financial services professional, so the case should not be heard in France, where he would benefit from greater consumer protection.
Quoted by the FT, Robert Falkner, a partner at Reed Smith which represents Valbury, said: “We are familiar with the spurious allegations made by the French arcade trader Mr Traoré (a seasoned market risk analyst formerly employed by Reuters) which are strongly denied as wholly without merit and will be vigorously contested.”
“This matter is now before the courts so that we consider it inappropriate to comment further,” said Mr Falkner, adding that Valbury had kept its regulators at the UK Financial Conduct Authority “fully informed”.
Valbury is expected to point out that Mr Traoré said in his application to open an account that he had traded futures and options frequently. Traoré admitted that he had “tried to embellish my trading experience and professional qualifications at the time, as I thought my application might otherwise not go through as easily”.
According to the court filing by Mr Traoré, which has been seen by the Financial Times, Valbury told him that it had treated the trades he carried out as a “manifest error” because he had thought he was using its demo platform and had not intended to place real orders. The brokerage also told him that he had breached his trading limits.
As for Traoré, his lawyers at Linklaters used an odd defense, claiming that the 41-year-old had no prior experience of financial markets and previously worked at Thomson Reuters, selling performance analysis software to investors, before being made redundant last year.
His lawyers also said Traoré should have been prevented from trading such large amounts by preset trading limits that could have been imposed by Valbury.
They disputed the brokerage suggestion that his orders were a “manifest error”, the definition usually given to fat-finger trading mistakes, because most of the profits were only made once he realised he was trading on the live platform.
Of course, none of this matters when the amount at stake could potentially put the brokerage out of business.
The stakes are high for Valbury, which made £9.88m of revenue in the year to December 2016 down from £11.7m the previous year. It reported its third consecutive annual loss of £455,405 in 2016 — its last set of publicly filed accounts.
Meanwhile, a more in depth look at Valbury and one wonders just how much impropriety there is at the company whose CEO, Mark Hanney, previously spent five years as financial director of Refco, one of the first US brokerages to collapse ahead of the 2008 financial crisis.
Finally, it is an absolute certainty that if the tables were turned, and if Traoire was the one who owed $10MM due to trading mistakes, it would be him that was being sued by the brokerage, not the other way around. We doubt that is a legal plea, however.
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Update: Valbury's legal advisor has notified us of the following:
Our clients are particularly concerned with the false assertions in your article that (i) Valbury’s financial standing may be affected by the outcome of the dispute with Mr Traore and (ii) that Mr Hanney was in some way connected to or responsible with the collapse of the US brokerage Refco, for instance:
“Of course, none of this matters when the amount at stake could potentially put the brokerage out of business.”
“Meanwhile, a more in depth look at Valbury and one wonders just how much impropriety there is at the company whose CEO, Mark Hanney, previously spent five years as financial director of Refco, one of the first US brokerages to collapse ahead of the 2008 financial crisis.”
In fact, the correct position is that in 2017 Valbury made a profit of EUR 10 million as a result of its own hedging activity in connection with the Traore matter. In addition to this Valbury recorded an operating profit from its sales activities with an increase in sales revenue of 25% in 2017. The FCA have been informed by our client and are fully aware.
With respect to Mr Hanney, he was not a director of the US entity that collapsed. He was a director of the UK Refco’s regulated UK business, which remained operational and solvent during his tenure. Mr Hanney was also a founding director of Marex-Spectron which included a management buyout of the Refco UK business and which was a successful UK broker. Your article is, therefore, clearly misleading and bound to be read as suggesting, falsely, that Mr Hanney has a track record of managing brokers that go insolvent or was in some way responsible for the collapse of the US brokerage firm Refco Trading.