UBS Rogue Trader Loses $2 Billion In Unauthorized Trades 360
PolygamousRanchKid writes with this snippet from Reuters that sounds like a ready-made movie script: "Switzerland's UBS said on Thursday it had discovered unauthorized trading by a trader in its investment bank had caused a loss of some $2 billion. 'The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion,' the bank said in a brief statement just before the stock market opened." Asks the RanchKid: "I wonder how this will reopen the debate about the role of computer systems in the trading and the safeguards that are supposed to protect against these risks. But if microseconds mean millions in trading ... who has time for checks?"
What? (Score:5, Insightful)
How does a human being engaged in $2B worth of fraud say anything about computer algorithms and millisecond-level trading?
Right.... (Score:5, Insightful)
Either these outfits are, in fact, handing people the keys to gigantic piles of risk with controls roughly on par with the ones used to keep bored 16-year-old cashiers from skimming the till, or there is a substantial amount of tacit looking-the-other-way as Mr. Golden Boy flouts the rules and makes huge piles of money, and then, if things go south, his actions were "rogue".
Honestly, I find it hard to believe the former. This industry is riddled with perverse incentives toward taking on outsize risk loads(that hopefully won't blow up until you leave, or will blow up in somebody else's face) in exchange for rewards now. Am I supposed to believe that Poor li'l UBS just got plumb slickered by some smooth talker, or that "rogue" is simply the PR response to those who operate particularly close to the risk/reward envelope and happen to stop producing the numbers that HQ wants to see?
"Rogue"? (Score:3, Insightful)
HFT is a problem (Score:5, Insightful)
High-Frequency Trading is a bet, not much different than counting cards at a Las Vegas blackjack table.
You're betting that:
- You get your trade in milliseconds or less before the opportunity vanishes.
- Your coders are not missing anything that would cause you to fail.
- Your coders are sharper than the other coders our there, or...
- You are taking from the humans, and aren't at risk from other HFT code.
- Nothing goes bad in all of this, from comm links to the market platform.
And of course you can always beg the SEC to unwind the transactions, claiming it was a programming glitch. That's been done before. The SEC is no longer an effective watchdog over the industry. It has in effect been 'captured'. Game Over unless Mary can turn it around. Unlikely.
When you dig into how the NYSE actually works today, with DMMs and 'liquidity providers', that one entity can account for 10-20% of total volume, and all of that is HFT, you may realize that the days of humans trading on news and speculation are over. If you want to hold for a duration and take profits over the span of years, just hope you don;'t need to cash out on the same day as the machines have decided they see opportunity in trashing your holdings. Nothing personal, it was an algorithm you know. Just happens.
It's a genuine miracle that we don't see more flash crashes and >$1B fails than we do. HFT is going ot destroy the market, but only for actual humans. One day, when we realize that 70% of the market volume is HFT, we will then understand that the NYSE in particular is a house of cards. Then what?
This level of trading is hazardous to the world (Score:4, Insightful)
I think it is increasingly clear that the more developed this trading gets, the more risk it offers the world's economy. It is also recognized that "safeguards" need to be in place to prevent certain things from happening. These same safeguards also serve to decrease that highly sought-after and desirable "leverage" power when making trades. These market people have been pushing regulators to remove such safety restrictions which have apparently been connected with all manner of troubles including the most recent market failure.
I wouldn't be against banning the markets entirely. I think Hitler had it right in his analysis of why speculating is such a problem for economic stability. (Just as in the legal system, the only real winners are the lawyers)
Of course the world's bankers would never allow any governments to take their playground away, but that's what I think should be done.
Re:HFT is a problem (Score:5, Insightful)
More or less, it's astonishing to me that the SEC hasn't cracked down on these scams. It's not like it's some sort of secret, people outside the industry know that Wall Street is largely run on fraud and insider trading and that there are massive bonuses handed out even when a company isn't doing well.
But, as long as the GOP continues to whip up anti-regulator sentiment, it's going to be really tough to get the regulations in place that are going to fix that.
Re:What? (Score:4, Insightful)
Because the banks could have checks in place to avoid this kind of unauthorized trading, but they chose not to because it would slow down the system a little bit. Bankers believe that a bank implementing all proper security protocols would be too slow to compete in this era of millisecond-level trading.
Re:makes me wonder who earned $2 Billion (Score:5, Insightful)
Ultimately, it is, because ultimately, every trade has a winner and a loser, and ultimately, the value of every stock goes to zero. We just haven't seen the game played out long enough yet (though we came pretty close recently).
No, it isn't (except in the 'in the long run we are all dead' sense). Consider the dot com boom. Over-inflated dot com stock valuations caused large amounts of additional investment in dot coms which were never going to make money, or quite possible provide any useful service at all. The economy wasted resources in pointless rubbish, thus reducing the amount available for consumption and investment in other things.
Stock market valuations and stock market investors motivated by them affect many decisions. Things like: should company x buy company y? What minimum rate of return should we require internally on our investments/what should we take our internal cost of capital to be? Should the current managers be retained? Should we raise money via a new share issue or IPO? What should I, as a VC or private equity investor, invest in and how much money do I get (from sales of businesses) to spend on new investments? What interest rate must the government pay me for me to lend to it instead of buying stocks?
I'm not going to claim stock markets do these well. I don't know the answer and I don't know what to compare them to. Nor will I claim there isn't a great deal of zero-sum or near zero-sum activity going on - that described in the article is almost certainly near-zero-sum (probably somewhat negative). It's quite plain, though, that these decisions have to be made and that they're important. They affect economic growth rates. They affect the distribution of wealth (amongst ordinary people, not just those in the industry). They are most certainly not zero sum.
Re:Digital money (Score:3, Insightful)
> If no one GOT this money? It never existed.
Nearly all our money originated with fractional reserve loans, making it fictional money. Take the entire US money supply, subtract Fort Knox and the Strategic Oil Reserves, and the difference is all vaporware.