Bloke opens dummy trading account with £17k, builds up a £880k loss...
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.. then realises it's not a dummy account after all.
Proceeds to build up a £3.8bn position, gains a profit, and is now suing the brokers for his subsequent £8.8m profits, because they won't hand them over...
Valbury Capital Really Should Go Bust Here - Allowing a £3.8 Billion Futures Position? - Continental Telegraph
This is a fun little story. Bloke decides he’s going to trade futures as an individual investor –…
Amateur trader accidentally made £9,000,000 on 'dummy account'
Broker Valbury Capital is refusing to pay Harouna Traore the money, saying he breached trading limits.
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@pjh I do see, however, his case having merit. Because after all, what would have happened in the reverse case if he had not been able to reverse his fortunes and stay in debt?
You can bet your ass that they'd have found him liable for the whole amount.
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What's the legal basis of their refusal?
That's like buying a lottery ticket, winning, and the lottery company saying: you won?? That's unexpected. We won't pay.
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@topspin it's not about legal basis, it's about millions of pounds. They'll do everything to stop the money from being paid and to delay it as much as possible - even more than in case of smaller sums.
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I don't understand the suggestion in the linked articles that paying-up the £8.8m could drive the brokerage into bankrupcy. Surely, if the trades actually happened then that money exists and could just be handed over?
Could it suggest that some sort of shadow game is going on, where the trades made by individual casual investors are not real and don't actually happen on a live exchange - and that normally the brokerage just works on the basis of covering any gains by small naive speculators themselves (on the cynical basis that most individuals will make net losses). That could also fit with the whole ludicrous scale of exposure of this speculator - surely checks on real trading would have kicked in long before he reached anything like £3.8 billion.
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@japonicus said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
I don't understand the suggestion in the linked articles that paying-up the £8.8m could drive the brokerage into bankrupcy. Surely, if the trades actually happened then that money exists and could just be handed over?
Not really. It's all a huge network of future and expired contracts that are settled through multiple middlemen, who might or might not be known to either or both parties. They don't have cash, they just have obligations from other people, but it doesn't matter and everyone gets paid on time as long as nobody demands instant payout of 9 millions.
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@japonicus said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
I don't understand the suggestion in the linked articles that paying-up the £8.8m could drive the brokerage into bankrupcy. Surely, if the trades actually happened then that money exists and could just be handed over?
Futures trade works differently from what I understand. This is one of those trading schemes where you can find yourself in huge amounts of debt very fast as this hapless trader found out.
Basically, you're selling a binding promise. You borrow shares from someone, sell them for the current price and then give them back at a later date which means that you have to buy them back first. If the price falls in the meantime, that's your profit. If the price rises in the meantime, however, you'll have to pay the difference out of your own cash.
Which means that if you buy enough futures and the price rises enough, the sky is practically the limit for losses incurred.
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@pjh If he was over his limit, why did they allow the trade? This is 100% the company's fault, fuck them, give this guy his money. Incredibly lucky guy. Because holy shit was he playing with fire.
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@rhywden I don't know, this whole thing seems pretty bizarre.
For starters, you really shouldn't be able to confuse a dummy account with a real account unless you're really stupid and don't read a single word you're clicking.
Allowing a £880k debt with just £17k liquid? That really doesn't sound legal. If it is, it reeks of malicious intent, and on top of that, no legitimate company would want this kind of potentially unpayable debt.
All the money you lose is money someone else makes. You get £880k in debt, but go bankrupt and can only pay £50k. Now the company still owes someone else £830k.Of course, if they're really operating on debt from suckers who will never be able to pay it back, it could explain why they can't pay the winners either.
And obviously... a £3.8 billion position with just £17k capital???? That's a leverage of 223,529x. For reference, the EU plans to limit leverage to 30x. Outside it, the biggest leverage you could possibly find is 500x. That firm is set in the UK, there's no way they don't have any similar cap.
Then again, this would explain the gains and losses. With a £3.8 billion position, it only takes a 0.24% increase in price to make those £9M, or a 0.023% decrease to make that £880k loss.
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this kind of plays into my general opinion that stock trading is a huge scam.
not because they refuse to pay up, but because...
... do you know of any other way to make millions "by accident"?"oh, tech support? i'm sorry, i didn't mean to, but i clicked this thing and now my account is reporting 9 million balance. how do i get rid of it? i'm not sure what i did, so this must be a bug..."
"no, sir, that's just stock/futures trading."
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@sh_code It's not a scam, it's more like a zero-sum game. As a trader, money you make is money someone else loses. In the general scheme of things, however, it serves a valuable purpose for people that are not full-time traders: it lets you make a trade now that would otherwise take months or years to be realized, if at all.
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@kian said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
it's more like a zero-sum game
Unless you hold the contract to completion, yes. It's all about coupling buyers to sellers in a way that doesn't require them to be both active at the same time. The middlemen are definitely in (damn close to a) zero-sum game, but the originators and final settlers are not. Futures trading (and currency trading) are where you can make or lose vast amounts of money very easily, and are supremely not recommended for anything other than professional investors as a result; astounding losses have happened in the past and will happen in the future. Valbury Capital are a bunch of idiots for allowing that level of leverage. They should go bust as a lesson to the rest of the industry to not let that happen again. It'll ruin a few people's careers in the process, but since they were not acting with even the most basic level of common sense it's no big loss to humanity.
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@kian said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
@sh_code It's not a scam, it's more like a zero-sum game. As a trader, money you make is money someone else loses. In the general scheme of things, however, it serves a valuable purpose for people that are not full-time traders: it lets you make a trade now that would otherwise take months or years to be realized, if at all.
Wasn't it actually invented as a tool to create a more reliable source of income for farmers?
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Wow, thinking about futures, they're scary. There's a limit to how much you can win, but there's no limit to how much you can lose.
So if I understand them correctly, you're paying someone $X to loan you assets valued at $Y (where Y is greater than X), for a period of time. At the end of that period, you are required to return the assets, whatever their valuation at that point may be. The purpose of this, one expects, is to increase your capital when doing later trades. So they're kind of like a multiplier for whatever other trades you would do later.
Leaving aside the results of those secondary trades, which could themselves be wins or loses, at the end of the futures contract you have to rebuy the original assets and return them. In your best case scenario, the assets depreciated completely and you can get them for close to $0. Things can't be worth less than zero. In that case, you basically made $(Y-X) for free. That's the most you can possibly earn (leaving aside, as I said before, the secondary trades. Imagine you had just sold the assets and held on to the money). But there's no ceiling to how much an asset can appreciate. If they increased by 10%, you now have to come up with an additiona $(Yx0.1). If they doubled in value, you have to come up with and additional $(Y). If they increased 10x, you need to come up with an extra $(Yx9) to repay them. There's not really a way to cut your losses, or even to cap them. With regular trading, the worst you can do is lose everything. With future's trading, the sky's the limit!
I'd never really stopped to think about it this way before. Scary.
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@rhywden said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
Wasn't it actually invented as a tool to create a more reliable source of income for farmers?
I think @sh_code was talking about stock trading in general. In any case, I can't speak of what future trading was invented for, rather what it is used for today. Also, I'm of the opinion that scams imply outright lying. If the conditions of a contract are clear (even if the consequences of agreeing to it may be misunderstood by one or more parties), and everyone follows the letter and spirit of the contract, it is not a scam in my opinion. People do dumb, reckless things all the time, it doesn't mean they're being conned or scammed.
Ultimately, I don't trust anyone else to decide what things are dumb and reckless for me to do and "protect me from myself". Even if it does burn dumb and reckless people, that's the cost of freedom. Some safety margins are reasonable to have, of course, especially when, as I said, there's no limit to the loss and that can impact people other than yourself.
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@kian I just love how you just empathetically stated something and immediately contradicted it again.
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@rhywden said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
@kian I just love how you just empathetically stated something and immediately contradicted it again.
Reality is messy, absolute statements and ideals can rarely apply directly. I don't mind reckless dumb people making a mess of their lives, but I don't want dumb and reckless people messing up my life without me having any say in it. I think speed limits and prohibitions on drinking and driving, for example, are a reasonable thing to have because someone driving drunk at high speed can kill people other than himself. If we each lived in isolated realities where the consequences of our actions applied only to ourselves, then sure, do whatever you want. But if you're driving several tons of steel next to me, and people in general have proven that they can't be trusted not to mess up and kill others, I think your freedom to kill me without me having any recourse should be limited.
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@rhywden said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
Wasn't it actually invented as a tool to create a more reliable source of income for farmers?
Oh, looking into the first linked article, they go into it a bit:
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.
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@kian What about only maiming you?
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@rhywden That's the part where "reality is messy" comes in. I want people to be free to do whatever they want, but that statement alone is a contradiction because one person might want to limit another person's freedom. So really, it might be more accurate to say that I want to be free to do whatever I want. However, since I live with other people, and to a certain extent need them, I'd like for whatever system we put in place to manage this coexistence to protect my freedom to the greatest extent possible.
The ideal form of this is an autocracy where I sit at the top and everyone follows my commands. It looks like a lot of people through history have thought along those lines too, but experience has shown that that is hard to make work. After a few millennia of bloodshed we've come up with a number of systems that acknowledge everyone as largely "equal" in principle, so no one can command anyone else directly. We can make sweeping rules, and even change them, but they can't be directly targeted at individuals.
That seems a fair compromise, but one has to be always on the lookout for where the balance in that compromise lies. Give too much power to the overarching authority, and it restricts your freedom. Deny it too much power, and other people can deny your freedom. Either extreme leads to less overall freedom for me.
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@kian said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
@sh_code It's not a scam, it's more like a zero-sum game. As a trader, money you make is money someone else loses. In the general scheme of things, however, it serves a valuable purpose for people that are not full-time traders: it lets you make a trade now that would otherwise take months or years to be realized, if at all.
That's not true either. You're trading shares linked to the value of a particular company, which is actively in the process of trying to create value.
Although it's true that every dollar you make on selling a share is a dollar that someone else pays to buy it, if you hold the share and its value increases, that is not someone else's loss -- the market has actually risen.
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@anotherusername said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
Although it's true that every dollar you make on selling a share is a dollar that someone else pays to buy it, if you hold the share and its value increases, that is not someone else's loss -- the market has actually risen.
It's not quite zero-sum, and shares can also pay dividend which pay out to whoever is currently holding it, but from the short term perspective of a trader it still is. As far as traders are concerned (traders being people who seek to buy before a stock rises and sell before it drops), every operation is a gamble between two people who have opposite valuations of a given share. When a trader sells to another trader, it is because one thought the share would go up in value and the other thought it would go down. One of them was right, and the one that was right will have made a profit at the expense of the one that was wrong, who lost potential money he could have made had he not made that trade.
It's a different matter when "end users", people looking to make long term investments, cash in dividends regularly, or sell assets they owned to finance themselves, make trades. If I want money to buy something else now, and sell to a trader, any fluctuation in price is irrelevant to me. The opportunity to change my asset into money and that money into another asset I value more highly at that point in time already created value for me, even if the asset I sold then gains more value. Likewise, if I am buying for the longterm and there's a sudden dip in the value of the share, I've still gained value in the act of getting something I wanted, and I may be banking on the dividends or long term appreciation to make up for immediate losses.
But "end users" (not sure if there's a technical term for these) can't exist without traders, so by existing, even if part of what they do is a zero-sum game, they do add value over all. I don't disagree on that point.
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Regarding the guy thinking he got a dummy account and actually having a real one...
Isn't there a £17,000 difference in the setup between the two?
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@kian said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
Wow, thinking about futures, they're scary. There's a limit to how much you can win, but there's no limit to how much you can lose.
(The problem isn't Futures, the problem is doing it on margin. If he'd invested using money he actually has, there'd be no story here. Ditto doing Forex on margin, stock trading on margin, bonds on margin, etc.)
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@kian said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
Wow, thinking about futures, they're scary. There's a limit to how much you can win, but there's no limit to how much you can lose.
I'd say the opposite; there's no limit to how much you can win (subject only to the market's performance), but there's a limit on how much you can lose: all of it. (Note that this means all of the contract's value, not just the funds you initially invested: see the paragraph below on margins trading.)
So if I understand them correctly, you're paying someone $X to loan you assets valued at $Y (where Y is greater than X), for a period of time. At the end of that period, you are required to return the assets, whatever their valuation at that point may be.
Not exactly, no. You never actually hold the stock (or if you do, it's a horrible mistake on which you've probably lost money). You're not borrowing or loaning it; actually, you're promising to buy or sell it in the future, at a price which you've mutually agreed upon now. In the meantime, you have to act as a middle man, so that you can fulfill the futures contract by buying from one person and immediately turning around and selling it to another -- at a profit.
There are two basic types of future contract: long and short. In a long trade, you expect the price to rise, so you promise to buy the stock for a predetermined price, $X, on a predetermined future date; in the meantime, you intend to find a buyer who'll pay you >$X for those shares, thus turning a profit. In a short trade, you expect a stock to go down, so you promise to sell it for $Y on a future date; in the meantime, you intend to find someone who'll sell it to you for <$Y.
Now, once you've made a futures contract, you still have to fulfill it, even if the stock price doesn't go in the direction you hoped. If you promised to sell some stock (mind that you don't have it, when you promise to sell it!), and the price goes up, you have to purchase it, because you have to sell it at the promised price -- below market value -- to fulfill the contract. If you agreed to buy it, and the price drops so that you can't find a buyer for it without taking a loss, then you'll end up holding stock that's valued at less than you paid for it, and you'll have no choice but sell it to recover what you can of your investment.
Now, actually, what you're buying or selling is the contract itself; so when you buy a contract, either long or short, you intend to exit your contract before it ends by finding someone else who'll buy it, or who'll sell you an opposite contract, and the two contracts cancel each other out. Obviously, in order to cancel, the two contracts have to be for the same number of the same company's shares on the same date. If you have bought one contract to buy some shares, and then you buy another contract to sell those shares on the same date, then both contracts will be fulfilled, and you just stand to pocket -- or you'll have to pay -- whatever the cash difference is between the buy price vs. the sale price. If you hold a long contract, you can get out of the contract either by selling it, or by buying someone else's short contract for the same shares; if your contract is short, you can get out of it by selling it, or by buying someone else's long contract. Either way, you don't want to end up holding a contract when it expires -- unless you actually wanted to buy or sell some stock.
Also, typically a contract will require up-front payment of some margin -- 5 to 15 percent of the contract value. This is deposited into your margin account, and it serves to guarantee the transaction -- if you lose money on the future deal, then it's taken from that margin. If the market changes so that you stand to lose a lot of money, you may be required to pay more into the margin account so it'll be enough to cover your loss.
Margins are like fractional reserve banking; they effectively mean that you can buy or sell stocks with value 10 or 20 times as much as the funds you actually have to invest, which means that your return -- or loss! -- can be very large. If you're futures trading with $100k worth of stock and you make $2k on it, what would be a meager 2% profit is actually 20% if your margin -- the amount of cash you actually had -- was $10k. But then again, if the stock price crashed and dropped by 10% -- $10k -- that's your entire margin, meaning you've lost 100% of your investment. And that's not even the limit to how much you could lose; you're technically on the hook for up to the whole $100k.
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@kian said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
So if I understand them correctly, you're paying someone $X to loan you assets valued at $Y (where Y is greater than X), for a period of time. At the end of that period, you are required to return the assets, whatever their valuation at that point may be.
I suppose that's one way to think about it, but the more common explanation is that a futures contract is an agreement that you will buy or sell a certain quantity of a certain good on a certain date for a certain price. If you're agreeing to buy, you want the cost to go up so you can immediately sell the goods at a profit, if you're agreeing to sell you either don't really care because you have the goods and have managed your risk by agreeing a price (this is the risk reduction for farmers) or you don't have the goods so want the price to drop so you can buy them on the open market and immediately sell them on for the higher agreed price.
The situation obviously gets more complicated when the contract is bought and sold in the time between the original agreement and when it comes due. Pricing is based on a complicated formula involving the time to excise, current prices compared to agreed prices and plenty of other factors
Options are similar but as the name suggests you are buying the right to buy/sell without the obligation. With options, you don't risk more than you paid for the option as the worst case scenario is that you don't exercise your right, you won't be forced to buy at over market prices
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@jaloopa said in Bloke opens dummy trading account with £17k, builds up a £880k loss...:
futures
All of which reminds me of this classic:
Special Delivery
Brad’s phone rang with the telltale tone of an inner-office call. “Yeah,” he briskly blurted out as he picked up the phone, “what’cha ya need?” That was actually his nice way of answering the phone. As the senior trader at Æxecor, one of the world’s largest energy trading companies, Brad didn’t...
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@dkf Nice. I was going to link it if someone else hadn't already. :)
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@dangeruss The TDWTF article actually references that itself, so you just need to chase some pointers.
