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Trader builds a $5 billion position on accident


stahleyp
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I find it incredibly odd (and scary) that a firm that "brought in about $10 million of revenue in 2016, according to the most recently filed public documents." can give anyone access to $5 billion in capital.

 

haha yeah, he was honest and told them about it so maybe he'll get to keep some of it.

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The fact that they’re trying to cancel his trades makes it seem like they are a bucket shop, not a real brokerage that executes client trades on the exchange in real time.

 

The trader is an idiot, and the brokers are idiots, but I want to know how the total lack of risk controls is okay with the British regulator.

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No chance.  20k cash turned into $10mm?  If he lost 1mm to begin with, the margin call on the futures would be enormous and the brokers would close out his position.  How did he think it was a fake account? You need to transfer funds, open a legit account, provide documentation etc... Nothing about this article sounds real.

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The article I read on this story mentioned the guy worked as a risk analyst at Reuters for years and didn't really sound like a newbie. My guess is he probably found a small brokerage with an old crappy trading interface and exploited it to gain more margin.

 

Chris Sacca tried something similar while he was in college. He found a bug in his brokerage account app that allowed him to use more margin than he was approved for as a broke college student. He ended up with 4 million dollars of debt before even graduating college because of the .com crash.

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What would you do if you had access to $1b margin for a month? Let's assume the cost of capital is similar to what IB charges, 2.5%. What trade will you make?

 

Put it all on red SPY same month calls. YOLO!  8)

 

 

 

Seriously, IRL I'd probably do nothing. Even with special situations, there is no guarantee they'd work out in a month and they likely won't be big enough to put in $1B.

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What would you do if you had access to $1b margin for a month? Let's assume the cost of capital is similar to what IB charges, 2.5%. What trade will you make?

 

Put it all on red SPY same month calls. YOLO!  8)

 

 

 

Seriously, IRL I'd probably do nothing. Even with special situations, there is no guarantee they'd work out in a month and they likely won't be big enough to put in $1B.

 

The best trade would be one where you are likely make a little, but have a tail risk of losing a lot. I think this can be structured by selling out of the money calls and puts simultaneously (forgot how this is called). The thinking is that even make a little percentagewise with a high likelihood is worth quite a bit with this huge sum and blowing up with $1B is somebody else’s problem.

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What would you do if you had access to $1b margin for a month? Let's assume the cost of capital is similar to what IB charges, 2.5%. What trade will you make?

 

Put it all on red SPY same month calls. YOLO!  8)

 

 

 

Seriously, IRL I'd probably do nothing. Even with special situations, there is no guarantee they'd work out in a month and they likely won't be big enough to put in $1B.

 

The best trade would be one where you are likely make a little, but have a tail risk of losing a lot. I think this can be structured by selling out of the money calls and puts simultaneously (forgot how this is called). The thinking is that even make a little percentagewise with a high likelihood is worth quite a bit with this huge sum and blowing up with $1B is somebody else’s problem.

 

This, IMO.

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What would you do if you had access to $1b margin for a month? Let's assume the cost of capital is similar to what IB charges, 2.5%. What trade will you make?

 

Put it all on red SPY same month calls. YOLO!  8)

 

 

 

Seriously, IRL I'd probably do nothing. Even with special situations, there is no guarantee they'd work out in a month and they likely won't be big enough to put in $1B.

 

The best trade would be one where you are likely make a little, but have a tail risk of losing a lot. I think this can be structured by selling out of the money calls and puts simultaneously (forgot how this is called). The thinking is that even make a little percentagewise with a high likelihood is worth quite a bit with this huge sum and blowing up with $1B is somebody else’s problem.

 

The problem is most trading strategies don't work with that much money.  I know of a $100M AUM fund that only does theta decay trades similar to the short strangle trade you mention.  Even at that size they have difficulty getting into and out of positions. 

 

Other trading strategies don't work well at scale because instead of coat-tailing the market movers you become the market mover. 

 

I know an engineer who day trades and has been successful for over a year.  I don't know if the strategy will work for all markets, but he has traded it long enough that if it was scalable he should be worth quite a lot of money.  He is not worth a lot of money because: 1. his strategy is not scalable, and 2. he spends a lot of money.

 

I decided a few years ago it wasn't worth my time to "get good" at trading even though I dabbled with a short theta trade for about a year.  If you look at the wealthiest people none of them got there (and stayed there) by trading options. 

 

Rant over.

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What would you do if you had access to $1b margin for a month? Let's assume the cost of capital is similar to what IB charges, 2.5%. What trade will you make?

 

Put it all on red SPY same month calls. YOLO!  8)

 

 

 

Seriously, IRL I'd probably do nothing. Even with special situations, there is no guarantee they'd work out in a month and they likely won't be big enough to put in $1B.

 

The best trade would be one where you are likely make a little, but have a tail risk of losing a lot. I think this can be structured by selling out of the money calls and puts simultaneously (forgot how this is called). The thinking is that even make a little percentagewise with a high likelihood is worth quite a bit with this huge sum and blowing up with $1B is somebody else’s problem.

 

I know ScottHall agreed with you ... and it's all for fun anyway ... but I disagree with you guys.  8)

IMO, under the conditions given you really do a binary YOLO trade. I really would like bet-on-red. I.e. 50% you double, 50% your $1B margin is gone - and as you said then it's someone else's problem.  ;)

 

But yeah you could decide what is an acceptable outcome for you and bet accordingly. E.g. if you are fine with getting $100M out of it, then bet on 90% chance you get 100M, 10% you lose $1B.

 

The problem I have with strategies that generate $10M 99% time and blow up 1% time is that ... why bother? If you risk to blow up, at least risk it for obscene amount of money, not for some 10M.  :P  8)  ;D

 

I am ignoring what JRM said that you might not be able to find 50/50 or 90/10 strategies because of the money involved. Although if you went for very liquid investments, you might.

 

And to repeat once more: this is all for fun, in reality I would very very likely do nothing.

 

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What would you do if you had access to $1b margin for a month? Let's assume the cost of capital is similar to what IB charges, 2.5%. What trade will you make?

it wouldn't matter if the end result was a 10M or 100M profit. Both are insane amounts. What matters is what you risk losing if you go into bankrupcy.

 

In other words:

a) If I had nothing to lose: "heads I win, tails I don't loose much" - Pabrai.

b) If I had something to lose: "why risking what you have and need for what you don't have and don't need?" - Buffett.

 

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