Feb

3

SocGen LogoCould our French colleagues comment on these aspects of the Affaire Kerviel:

1. Unappreciated low level trader from humble background

2. Big bank known for sophisticated derivative Quant trading by golden boys from elite technical/math universities

3. Gamed the system by hacking compliance and creating false offsetting trades and deceptive emails

4. Industrious - actually skipping holidays in a country which is a holiday

5. Courageously trading OPM through huge swings, at times extremely profitable, in mere hopes of a bigger bonus

6. Bank chose its best trader to unwind into a multi-week market bottom: Waiting 2 weeks could have again been highly profitable

7. He will be lionized in France, where they appreciate when the rich are victimized. (Come to think of it, there will be a place for him on Hillary's cabinet)

Bruno Ombreux replies:

Regarding Point 2. Actually, they are not sophisticated. The secret to equity derivatives is having a good marketing department and a good sales force. Some of the stuff Jerome Kerviel was hedging, the things called turbos or clicquet options , are mass-marketed equity derivatives designed to part innocent retail investors from their money. With good salesmen, one parts "sophisticated" pension and hedge funds from their money just as easily, except the sale is not done in the mass media but by building relationships with invitations to industry functions and over glasses of champagne.

Serendipitously, I am reading "The complete arbitrage deskbook" from Stephane Reverre, who happened to be head of index arbitrage and quantitative trading in the Tokyo and NY offices of Socgen. Obviously, he is describing activities he learned at Socgen. They are very basic. Nothing sophisticated. They just require a lot of money and good execution. Good salesmen are really helpful here again, for instance in the equity loan market.
 


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