When Market Prop Bets Go BadÂ
It was business as usual at a top Japanese trading floor until suddenly, an employee disconnected his desk phone and went AWOL, leaving 320-million-dollar market losses laying bare. This is the daddy of all market oopsies, and it only gets better folks!
Mitsubishi made a bet on oil. It’s never a loss until you sell, but the firm cut its losses and took the hit. Only a week later, salt was rubbed in its wounds as Saudi oil production was attacked and the price of oil jumped 10%! Oh dear. It’s hard to tell yet if these losses were all the rogue trader’s own doing, or if the dealings were approved by higher-level managers and this poor fella is just the fall guy. Either way, something clearly went very, very wrong!
The “investment” was in oil derivatives, which are like market wagers. Two people find something they disagree about (preferably finance related), and one side pays the other money depending on how the future unfolds. Sounds simple, but derivatives can get very complicated, very quickly.
Often, investors don’t have a say in buying them. The two most popular contract types are options and futures, representing the only way to make plays on certain instruments. From the peso to pork loins, from interest rates to the weather, nothing is off-limits to the $500 trillion (yes, you read that right) over-the-counter derivatives market.
Is Mitsubishi willing and able to write the $320 million check? We don’t know. The Singapore-based trader has sealed his place in the stock market hall of shame by wreaking havoc at work with gambles never for the faint of heart. But, then again, neither were any of the best investments in history. Let this be a lesson, nonetheless. Great investors always keep their investing simple. Now if you’ll excuse me, I need to check on some pork loin futures.
