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Valbury Capital Really Should Go Bust Here – Allowing a £3.8 Billion Futures Position?

This is a fun little story. Bloke decides he’s going to trade futures as an individual investor – a dumb decision to start with. He signs up with some company which then “trains” him to do so – another dumb decision. These sorts of companies tend – not this specific one, of course not – to be methods of extracting all your money in commissions and nothing else. So, he opens what he thinks is a dummy account so he can pretend trade. Loses a lot of money – and then realises that his account is live. At which point he dramatically over-trades, manages to make a small profit and yes, on the volumes this is small, then claims his cash.

Company won’t pay because they’re arguing, well, they’re arguing. The actual lesson of this, given all of these reported facts, is that Valbury Capital should go bust for the safety of all the other participants in the market. Even, at the extreme, for the integrity of those markets.

But he only realised he was handling real money after placing bets on £880 million of futures, running up a loss of around £880,000. He carried on buying and eventually built up a £3.8 billion position in US equity futures, turning it into a profit of £8.8 million.

There is simply no way that should have been allowed to happen.

Harouna Traoré, who’s based in France, opened a £17,000 account with British brokerage Valbury Capital after completing a trading course.

£17,000 is, I assume at least, the capital that he put into the account.

So, the first thing is that this difference between dummy and live accounts should never have been possible. But, you know.

The second is that an account with £17,000 in it should not have been able to run up £800k and change of losses. Because the point of such a deposit is to be the capital backing the trading. If and when – and with these accounts it nearly always is when – it’s lost then the positions should be closed out with stop losses and that’s that.

Yes, there is a reason for this. The futures markets are zero sum games between the speculators. They have a wider value, in that they shift risk from producers and consumers to speculators, from those who don’t want it to those who do. But among the speculators it’s zero sum, whatever is made by one participant is equally lost by another. Thus it’s rather important that every participant is good for their losses.

The third mistake is that he was able, on a £17k deposit, to gain positions with nominal value of £3.8 billion. Futures brokers are supposed to monitor the leverage of their speculators. He needs a 0.0004% move in prices to entirely wipe him out on that capital base. That might actually be smaller than a one basis point movement in the market in fact, certainly it’s under the random walk limit (to explain, at some level of either time or size of price movement markets are random walks. We don’t know and it’s not even theoretically predictable which way the next price movement will be. At some more macro level we might be able to say that this stock will fall 20% today, but at some microsecond level we don’t know whether the next price movement, even inside that 20% fall, is up or down. 0.0004% is definitely here at that random level).

Anyone allowing real positions to be built up on a deposit of that size should be drummed out of the market.

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.

Good, they should go bust. No, not over any detail of this, but that they allowed it to happen at all.

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6 years ago

A stock investor accumulates assets, perhaps hoping to profit from price fluctuations. A futures trader is gambling. It is not entirely recreation, as Tim notes the social utility of shedding risk, and that it depends on the integrity of the participants. Nothing wrong here except one bad actor. Incidentally, the latest US “stress test” has finished, with the government finding that 30-odd “too big to fail” institutions would survive an economic downturn. Tim often notes that these tests cannot anticipate real-world stresses, and are sometimes designed to output desired findings. Now, why shouldn’t a recession take down one or two… Read more »

6 years ago

Unless I’m missing something, this all seems a touch fishy… initial margin at the exchange prevents any overly large positions being opened, and limits losses: Major features of the futures market being that all counterparty risk is with the exchange rather than other market participants, and the position holder’s market risk is limited as positions closed are out automagically as the margin falls. Looks like their only real “mistake” here was the company letting a random rookie investor trade their entire credit line rather than just his own investment – a somewhat courageous trading strategy perhaps, but one that seems… Read more »

chap in chelsea
chap in chelsea
6 years ago

Speaking as a former futures trader/broker, my reaction to this was to read it… and then read it again slowly in disbelief… surely there is more to this than reported, or all I can say is “what the actual fuck?”… even in Reuters Machine pre-computer days (I do not count that Sinclair with a push-in RAM-pack that fell out if someone thumped the trading desk with a Champagne bottle), we would never have let such a situation develop, not even close. As it happens, the Errors & Omissions Account (in both the New York & London companies I worked for)… Read more »

bloke in spain
bloke in spain
6 years ago

Like the Chap in Chelsea, it’s a mystery to me. But then so have all the other trading disasters over the years. I’ve run trading books & your job is to know your positions across them. Somewhere in the system you need to have a live bod. Human wetware is infinitely better at things like pattern recognition & extrapolation than any foreseeable assortment of chips. The wetware’s self programming with a full suite of error recognition algorithms. Incidentally, that “random walk” isn’t actually a random walk. It’s a reflection of numerous trades in a market, each individual trade having a… Read more »

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