<p>What is the sovereign debt product that they purchased, how is it traded and with whom?</p>
<p>I don’t know the exact products MF Global traded.</p>
<p>They were long sovereign debt. And the prices collapsed. </p>
<p>I could guess they used futures…Maybe options. It looks like they were using their customers money…so that increases their own leverage.</p>
<p>You can trade these products all over the world.</p>
<p>There are options on stocks, etfs, indices and futures (I think). I don’t know how you do this with this debt and where it is traded. So they were long and things collapsed, there was nobody willing to take the other side of the trade. I’m a bit surprised that Corzine who has screwed up before wouldn’t carefully consider risk. He must have a different psychological makeup than many others. I wouldn’t have had the same confidence unless I was right every time before.</p>
<p>People were willing to take the other side…there were bids…just not at the prices MF Global needed to get out.</p>
<p>I don’t think MF Global ever wanted to get out. In retrospect, the firm would want to get out, but in real time…</p>
<p>Buy an asset at 100… Trading 99…buy more…trading 97… Buy more…trading 93… Buy more…isn’t this great…we are getting great prices…we are going to be super rich…trading 90…hmm…trading 88…that’s it…let’s load up…trading 84… Ok we are out of capital. Let’s use our clients money and buy here…and if the price rises back to 92… We can get out for even…trading 75…the market doesn’t understand
what we understand…trading 70…FU… get the shredder…</p>
<p>Doct…maybe you read something like this?</p>
<p>[New</a> Study, Old News: Stock Traders Are Psychopaths - Forbes](<a href=“http://www.forbes.com/sites/chrisbarth/2011/09/26/new-study-old-news-stock-traders-are-psychopaths/]New”>New Study, Old News: Stock Traders Are Psychopaths)</p>
<p>“This is fascinating stuff, but it’s not entirely new. In 2004, New Scientist compared ladder-climbing corporate employees to psychopaths for their shared characteristics of lacking empathy and compassion while thriving under stress.”</p>
<p>Yes, I had read that - I care about making money but to make money, it also means not losing a lot of money. Buying with the market going down in 2002 cost me a lot of money which I’m still writing off in my tax returns. I learned that it is not a good idea to try catching a falling knife.</p>
<p>I do not catch falling knives either.</p>
<p>If a piano is dropped from the 100th floor of a building and you try to catch it on the third floor…you are still dead when the piano hits the ground.</p>
<p>You may not have the psychosis of some traders…but it looks like Corzine does.</p>
<p>From the Rules of Trading by Dennis Gartman:</p>
<p>NEVER ADD TO A LOSING POSITION</p>
<p>R U L E # 1
Never, ever, under any circumstance, should one add to a losing position … not EVER!</p>
<p>Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. The only thing that can happen to you when you average down into a long position (or up into a short position) is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous, but for every example of fortune shining we can give an example of fortune turning bleak and deadly.</p>
<p>By contrast, if you buy a stock or a commodity or a currency at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, all prices tumble. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position. However, as long as you buy at higher prices, the market is telling you that you are correct in your analysis and you should continue to trade accordingly.</p>
<p>R U L E # 2
Never, ever, under any circumstance, should one add to a losing position … not EVER!</p>
<p>We trust our point is made. If “location, location, location” are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.</p>
<p>Only buy when the chart is “going from the bottom left to the upper right”</p>
<p>It seems like such a basic rule and I’d guess that their traders knew it but ignored it.</p>
<p>The good traders that I know - if there’s a stock that they really like, they go long with a stop - if it drops below their stop, they get taken out and then they look for a lower entry point and then they repeat the procedure. They don’t average down - they take the loss and then move on.</p>
<p>I also was very interested in what was the actual trade/position that MF Global had. They did NOT take a big flyer on intermediate term sovereign debt, expecting the price to go up. Their position was actually a very low risk position. It probably would have worked out at Goldman.</p>
<p>They bought a variety of Sovereign debt, all with maturities under 1.5 years. They owned some Italy but no Greece. Their holdings as of Sept 30 are shown here: (Note they even had some shorts in French bonds that they considered a hedge, but I don’t think that is terribly significant)</p>
<p><a href=“Account Suspended”>Account Suspended;
<p>All of their positions were financed to maturity in the repo market. These positions were not going to be a “homerun”. All they were doing was making a spread between the yield on the bonds and the lower financing rate. Here is the crucial part of the trade that made it low risk: All these bonds matured in 2012 and were covered by the European Financial Stability Facility, so they were viewed as government guaranteed debt. That would explain why the counter-parties to these trades accepted the securities as collateral for low rate loans. It also explains why these counter-parties have not taken huge losses on these trades (at least none have been reported yet. We don’t even know who the counter-parties are). </p>
<p>It was a liquidity problem. Rightly or wrongly, the market price of these securities dropped and the counterparties demanded additional collateral which MF apparently did not have. I don’t know how rock solid the guarantee was; I don’t know if it included all interest payments as well as principal. Apparently the market and the conter-parties got nervous. Here is an article that explains the trades:</p>
<p>[News</a> Headlines](<a href=“http://www.cnbc.com/id/45132384/The_Trade_That_Killed_MF_Global]News”>http://www.cnbc.com/id/45132384/The_Trade_That_Killed_MF_Global)</p>
<p>I have to say that now that I have a clearer idea of what happened and what went wrong I wold not characterize Corzine as a “rogue trader.” Perhaps he was guilty of a lack of imagination in not thinking about the things that could go wrong with a trade that might have been described as “risk free” or “free money” when the trade was put on. The thought process goes something like this: “Oh look! These bonds yield 3% and I can finance them at 2% to maturity AND they are government guaranteed and insured. Let’s put as much of this trade on as we possibly can!”</p>
<p>The way Corzine leveraged the trades made them risky. The firm could not cover it’s margin calls…covering margin calls is very basic stuff.</p>
<p>You can turn a trade with very little risk into a trade that can blow you up.</p>
<p>You can take a trade that works 99.9% of the time and turn it into a trade that blows you up.</p>
<p>Thane for the links NJers…I look forward to reading them later. And I like the info.</p>
<p>I was just talking to a friend of mine. He had a large part of his wealth at MF Global. They moved his trades over to another firm, but…they kept his cash at MF Global. And he needs access to that money at some point. 95% of what he had at MF Global is frozen.</p>
<p>I’m not a big fan of Dennis Gartman…and his analysis of continuing buying into an up market is incorrect.</p>
<p>You can buy a stock at 20, then 21, then 22… and then watch the stock gap down to 18 for example…</p>
<p>And buying on the way down it depends… Did you buy a full position on your first buy?</p>
<p>It’s not as simple as Gartman says…</p>
<p>Most firms got their money back @ or around 80%.</p>
<p>Your friend should get his money, now, though. The CME is going to write a check to cover 300 MIL, I think…</p>
<p>I hope it works out for him.</p>
<p>BC- That’s a huge oversimplification of what happened at LTCM. It had much more to do with liquidity than with doubling down on a “bad” postion. The positon itself wasn’t the problem, the problem was they didn’t have the time to get the profit out. It’s not throwing good money after bad.</p>
<p>Also, what you just described is interesting for directional trades but it really doesn’t have that much to do with option spreads. </p>
<p>Corzine’s problem, and this is a problem faced by anyone who has only traded at a firm which is basically backstopped by the federal treasury, is that he didn’t have the experience to understand that time is finite for traders. His past blow ups he had almost a year to get out of it. He didn’t have the experience to understand that someone who is not Morgan or Goldman can have their margin called. </p>
<p>It’s why when you say someone is very experienced, the experience isn’t always the “right” kind for the job.</p>
<p>One method that works (at least over the last 10 years) is to buy long in increments as the market goes down - the amount depending on the move relative to average volatility and to sell long positions and buy “short positions” when the market goes up. Of course, key considerations is to reduce trading costs, and the amount to buy or sell - it also works better I believe with instruments that track the indices.</p>
<p>Wouldn’t it make sense to have companies clearly divided into two camps - those that manage instruments we can’t afford to fail, like pension funds and those that are Vegas-like. Then have regs that the former is not permitted to dabble in foreign money, leverage, etc. and be forced to invest in boring instruments, and let the the latter bear a clear “won’t be bailed out by taxpayers” on their back and let them throw money at anything they want?</p>
<p>
</p>
<p>Of whose analysis are you a big fan, dstark? Anyone made some cashola for you?</p>
<p>Dad–of-3- That is kind of what GLass Steagall did…</p>
<p>BCE,
Fundamentals and relative Carrying and Capital costs can also make a difference- make a stock look even more attractive to me at a lower price, as someone else decides to dump it.
I guess I am not such a momentum trader or investor as you. But I do understand that you are respecting that a declining security may be signalling something new that I or the market did not know, so I guess it is ok to have a general policy to stay away. But I think there can be contrarian possibilities of mis-pricing and mis-information, esp for those who hold positions for a long time (obviously many positions are limited in term), which does require a constant watch on all these factors, however a kind of “cost.”</p>
<p>I am sure a regression analysis can be done (not by me!) looking at stocks with abrupt changes in direction to the downside to see if this usually lasts a good while. Maybe you have done such a study?
Don’t you think that, depending on the liquidity of the security, the significant number of traders with stops and such that they could be making the decline stick, sort of reinforcing the trend???</p>
<p>Trend followers do continue to buy going up - “the trend is your friend”. Although I don’t get the “world renowned Gartman Letter”, I watch him frequently on CNBC along with the other “Fast Money” crew . He along with the others including that “Mad Money” guy change their tune everyday.</p>