Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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There's something happening here
What it is ain't exactly clear
There's a man with a gun over there
Telling me I got to beware
I think it's time we stop, children, what's that sound
Everybody look what's going down…
"For What It's Worth" by Buffalo Springfield)
Over the past years, I have brought you several “Great Moments in Trading Infamy.” You may recall my recounting the story of Nick Leeson, the “rogue trader” who broke the venerable Barings Bank of England. I have written numerous times about Brian Hunter, the young Canadian trader who just happened to lose 4.8 billion dollars (over a weekend in the fall of 2007) for the now-defunct Amaranth Hedge fund by making a bet against nature. Well, please hold on to your chairs, because the biggest fraud in investment bank history happened over the weekend.
Amid the talking heads on all business networks, amid the fear and greed of those who are watching every tick of the market, the big picture can be lost very easily. What really happened to the global markets over the weekend when the U.S. was closed this past Monday? A single rogue trader, whom I have nicknamed Evil Kerviel (may Evel Knievel rest in peace), was responsible for this entire debacle.
This is what sent shock waves through the entire global market and caused the Fed to do something unprecedented, cutting rates 0.75% in order to "save" the markets from themselves: A single trader lost $7 billion plus for his bank by hiding accounts and overleveraging (to put it mildly). It was the unwinding of these positions on Monday, January 21, that sent the futures into a downward spiral and forced the Fed to act. (Although the Fed denies they had knowledge of what happened when they made the emergency announcement on Tuesday morning, one can be quite sure that they knew something had happened.) Who was thinking about this?
Who wondered how it could be possible that the ES (the futures market for the S&P 500) was down some 68 points at one time during the night, and who else but readers of the Trading Wisdom message board on www.trending123.com were up at that hour watching? John Lansing, founder of www.trending123.com and I were up all night in two different time zones watching this, and we were posting on the message board. John saw that the futures were halted and posted it immediately. How many of you were watching as the global markets went into freefall? How many of you truly “get” that money never sleeps, that we are in a world of instantaneous communication, and that the speed of everything is accelerating logarithmically?
However, I digress, and here is some of the story. Certainly, a great deal more will be revealed, but this is a summary to as of this writing. I will post more on the Trading Wisdom section of the Message Board.
“Société Générale's Fraud: What Now?
After a rogue trader cost the French bank $7.1 billion, many are left to wonder about the lucrative but risky equity-derivatives business.
How could this possibly have happened? That was the question being asked in financial circles worldwide Jan. 24, after France's Société Générale, one of Europe's biggest banks and a global superstar in the booming derivatives-trading business, disclosed a staggering $7.1 billion loss from rogue trading by a single employee.
The simple answer is this: One of the biggest frauds in financial-services history apparently was carried out by a 31-year-old trader in Société Générale's Paris headquarters, whom multiple news sources have identified as Jerome Kerviel. The trader "had taken massive fraudulent directional positions"—bets on future movements of European stock indexes—without his supervisors' knowledge, the bank said. Because he had previously worked in the trading unit's back office, he had "in-depth knowledge of the control procedures" and evaded them by creating fictitious transactions to conceal his activity.
The fraud was discovered Jan. 20, a Sunday, which meant Société Générale had to start unwinding the positions Jan. 21 just as global equity markets were tanking on fears of a U.S. recession. "It was the worst possible time," says Janine Dow, senior director for financial institutions at the Fitch ratings agency in Paris. SocGen, which also announced a nearly $3 billion 2007 loss related to U.S. mortgage-market woes, has had to seek a $5.5 billion capital increase and could even become takeover prey.”
Source: BusinessWeek. Full article can be found here.
I will add to this that someone knew about these positions, because there was, in the snake pit, a cold-blooded buyer waiting at 1255.50 on the ES. Who was that waiting there, sitting on the bid and not budging? That was someone that knew a blow-up was coming and was ready for it. That is why they call it the snake pit: It is cold-blooded buying that does not budge and stops the selling squall. That snake gobbled up something like $7 billion.
Futures trading is a zero-sum game. Someone made $7 billion plus on that trade. Someone knew. If you think the playing field is fair, please think again. I know that people don't like me to talk about trading as a war game, but it is.
The strong kill the weak by taking their money. It is the same in the wild and in life, but money is not always involved. In the markets, the one with the most money wins, so monies are the spoils of the market war.
Now you see why it is important to keep cool when all around you others are losing their senses. Stop, breathe, ask yourself what is happening and do not make boneheaded moves to wipe yourself out and give money to other traders. If there ever was a time to take charge of your rat brain, it is right here and right now. Remember that your rat brain will always make you feel greedy when you should feel fearful and vice versa.
Paranoia strikes deep
Into your life it will creep
It starts when you're always afraid
You step out of line, the man come and take you away…
"For What It's Worth" by Buffalo Springfield
Until Next Time,
Good Trading and Brain On!
Janice Dorn, M.D., Ph.D.
janice@thetradingdoctor.com
P.S. Every week, I send you a Trading Wisdom designed to make you better, smarter, more balanced traders. Today, I want to ask you, “How are you doing?” Please join me and your fellow traders at the message board and tell us which of my Trading Wisdoms have been most helpful in getting you on a path to profitable trading. How have you used my methods and insights to make big money or avoid huge pitfalls? Tell me what you think, and your favorite Trading Wisdom may be featured in my upcoming book! Stop by today!
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