UBS and the Magic Umbrella
UBS & The Magic Umbrella
UBS & The Magic Umbrella
With nothing in my diary of late I decided to attend the trial of Kweku Adoboli the “rogue trader” of UBS. It has been alleged that he and he alone was responsible for up to an eye popping $2.5 Billion in trading losses. Kweku is Twi (Ghanaian) for Wednesday born, and the name is associated with a hard-nosed type of boy, but looking at Kweku he seems an affable type of young man. Sitting in the courtroom surrounded by his legal team he seemed like somebody glad that the show has began. Other than his legal team only his sister and another fellow were there to provide moral support. With a platoon of News reporters in attendance, I was informed that last Friday there were 80 but today only around 15. Given the scale of what has happened it seemed like he has been hung out to dry. As events began unfolding the obvious question was "Why was he the only one in the Dock?". He is a man who had rose steadily up the ranks with a starting salary around £30,000 with a £10,000 bonus, then the next year £33,000 with bonus up to £15,000 then two years later a £110,000 salary and £250,000 bonus made of shares. The bonuses were paid out annually around February covering the previous year. The prosecution made much of his profligate spending. At the time of his arrest his scattered accounts were overdrawn. For a young man earning £6000.00 per month net it’s not the first sort of profile customer you’d expect for Payday or Wonga loans yet that’s what he applied for. He had his fingers rapped over having an IG spread betting account, trading a number of shares, Daimler and Tullow Oil for example. Yet his trading was not too great since in the year 2011 he had lost £123,000. That's £13,000 more than his £110,000 salary. It means that until he received some of his bonus he was skint. Considering that spread betting is the amateur version of his own profession of trading that alone should raise alarm bells. Later UBS banned it’s traders from having a spread betting account yet he still went ahead and opened a City Index account. His trading improved and he managed to generate £18,000 profit. I would hazard a guess and say that most traders have spread betting accounts. It’s the 21st century version of “Front running” and most possibly an unofficial “perk” of the business.
The term; “Let him who is without sin cast the first stone” Comes to mind. During the lunchtime interval I was introduced to Kweku in making some small talk as he glanced at the book I was holding in my hand I asked him: “ Have you ever read this book?” – Reminiscences of a Stock Operator by Edwin Lefevere “That book is real old school, I started to read it but found it a bit dry.” Then on reflecting he added; “Maybe if I had of read all of it I might not be here.” The prosecution barrister after having gone through Mr Adoboli’s personal finances kept on droning on in a flat tone, sending both me and one of the Jurors to sleep. Just when I thought it was a mistake to be here in the courtroom and was fidgeting in my seat along with the five other only members of the Public the prosecution called in a Mr Evans, the independent Expert. Mr Evans, apparently held a number of senior management positions in J.P Morgan so the jury was lead to believe that he certainly knew his onions regarding trading. He was no longer with JP Morgan now. The barrister for the Defence established from Mr Evans that he had only spent 3 years on the actual trading floor between 1998 and 2001, during the boom times of the dot.com era of trading! Using the car sales man analogy he tried to explain to the Jury what traders do. Starting with selling or buying one car, but rapidly expanding to selling millions of cars until the Barrister had to pull him back down to the notion of selling or buying one car. To be fair he done an okay job, but when terms like selling 1,500 put options were mentioned in emails sent to and fro between the trading desk, he did not do a good job in explaining what sort of size 1500 put options are and how that would affect the market. 1500 options = 15,000 euros per tick minimum movement x 100,000 euros per options contract value…………do the maths 100,000 euros x 1500. This was the banks exposure to the market on one occasion.
The prosecution seemed to make great play on the notion of risk between booking a trade and the settlement date. To my surprise the Expert witness was going along with it. The implications being made that some sort of funny accounting was going on between the time a trade was booked and the time it was actually settled. Basically trying to portray trader’s risk as within this time. So we are told that the important things to consider when settlement comes is: a. the Price b. the Size of the contract c. and the delivery date I would also add, or would think the direction of that trade was very relevant did the trader buy it or sell it? The reality is that one of the biggest risks is between the time when a trade is entered into the market and closed out of the market. But here’s the rub. Trial by jury was originally supposed to be being judged by one’s peers. But in all honesty when the expert witness Mr Evans tells the jury that a number of synthetic longs were made and at some point an exchange for physicals were required, do we really believe that a random jury would understand what he is talking about. After all the explanation of a Futures contract was a bit flawed. When I was studying to become a derivatives broker I decided I was going to do some intensive study and complete the exam in four weeks flat out. Here the jury is expected to go from basic concepts to high octane trading with hedging of position and delta one to boot within 8 weeks. Surely in matters like this one should judge one’s true peers that is other traders from other Banks who understand the rules and environment. Or at the very least the jury should have a day out on a trading floor and have an Expert witness explain what is going on. You cannot get that through looking at a photograph. Still I am sure that they will be doing catch up but boy that’s a lot of homework. These investment bankers certainly know size. On a desk of four traders their desk trading limits were $100 Million, but still to come more information is required to understand what type of trades they were doing, how many trades per day, or were overnight positions being taken which would have required bigger margin requirements. That in turn would require authorisation. For example on the DAX the margin for a 1 lot during the day is 2950 euros but for an over night position it’s around 13,000 euros, so total margin call in the day on say 1500 lots would be 4,4250’00 but if you kept that position overnight an additional 15,07,500 would be needed. Another interesting point was when the Defence Barrister was asking the Expert about the role and job of the trader being to buy at a good price and sell at a good price to make a good profit. The expert pointed out that it also depends on whether the banks clients also wanted the financial instrument (product) too. In such an instance the Bank would be likely to “give up” the trade and defer to the client, to maintain good relations. That would seem fair, but in this instance the question referred to proprietary trading not market making so( I am no lawyer) I assume that “Chinese” Walls would be required and therefore the banks clients should officially not even be aware of the goings on of the Banks proprietary desk since this is Desk trades the banks capital not the clients. I would seem that “Chinese Walls” have ears. Indeed it is surprising that the Financial Services Authority do not automatically serve as Expert witnesses and relate to a jury exactly how things should be according to it’s own directives. Some discussion was made about the old question: “Is trading and gambling the same thing? “ Also mention of the martingale technique a classic losing strategy based on the arcane habits of the residents of a Southern European town known to always double up if they have lost the previous bet. Most traders carryout the anti martingale effect of only doubling up if they are winning. It’s all there in Edwin Lefevre’s book on Jesse Livermore. Much comment was made on the use of IB or messaging systems traders and brokers love them. To the extent that they using them to communicate with each other on the same desk. It’s a new way of whispering to one another. You can communicate your ideas and thoughts to the person two seats away from you and the man or woman in the middle won’t even know what your talking about, unless you decided to add her to the chat room. This is how traders communicate, some say its all about fast markets and getting the message out quicker………..I disagree. For me it’s about creating niches, sub-groups, in groups and out groups depending on who has access to the chat room. This assists in directing traders in their trading decisions. It's an area that needs regulating. One point that has yet to come out of the trial is the timing of when all this was revealed. Things started getting hot for Kweku around late July and early August 2011. Fellow traders check your charts we all know what was going on at that time. The year started with a little bump over the Arab Spring. Then a larger bump with the Tsunami and earthquake in Japan. Then the Sh*t really hit the fan in late July\August with the Obama medicare indecision of the congress and the politics of dragging through followed by the rogue ratings agency that decided to down grade the USA for the first time in the USA's history. I suppose it was the economists version of an anti Nobel Peace prize on Obama's handling of the economy. The net result was the largers drop in the Equity markets since 2008, and for those of us seeking refuge in the Bond markets that too decided to become extremely volatile on the bearish side. I documented my trading over this period. It would seem that this was a catalyst that brought out the problems on Adoboli's desk. Estelle Shirbon of Reuters writes: “The question of how much UBS managers knew about Adoboli's trades and whether or not they condoned his breaking of internal rules in the pursuit of profit will be central to the case.” In the 1990’s the name of the secreted account in which Nick Leeson hid his trading losses was the notorious 8888 accounts. In the 21st Century version it’s called the Umbrella account. So what is it? It appears to be an account that is used by traders to smooth out one’s P&L sort of like how the Italian Businessmen always have two sets of accounting figures, one they show the tax man and the true one. In Kweku Adoboli’s case this “Umbrella” account appears to of been used routinely by more than one person on the trading desk. John Hughes another senior trade once commented to Kweku via IB "All I can say is thank fuck for your umbrella," then again "We might need to unlock some umbrella." . On another occasion he asked Kweku "How much is (in the) umbrella?" Estelle Shirbon of Reuters writes: “The question of how much UBS managers knew about Adoboli's trades and whether or not they condoned his breaking of internal rules in the pursuit of profit will be central to the case.” Well it was certainly a gripping day at Court, I think as a trader the last word should go to Kweku Adoboli that aptly describes the whole situation: “When I was young I used to think I did not know much but all the people higher up did, now I am older I realise that they don’t know very much either.”