The 10 Largest Trading Losses In History

The Chinese say, May you live in interesting times. This year the market started out the year with a few truly interesting backdrops. Among them a colossal trading loss that shook Société Générale to its core.

Did you know that Jerome Kerviel’s was the largest trading loss in history?

At least so far!

To provide some context about loss, here are the top 10 trading losses ever. At least, it can provide you with some perspective about yours.

Notice how all, except for one, were a result of trading in derivatives? The only equity loss big enough to make it on the board was $0.8 billion (by Friedhelm Breuers from WestLB, Germany) which ties for last position.

Lesson? Trading derivatives is like juggling running chainsaws which also happen to be on fire. Unless you know what you’re doing, it will get messy.

Sure, these losses look unreal, but each and every one of them started out as a small loss. The only reason why they are up on the board is that they were allowed to balloon into grotesque proportions. So it is with the losses of us mere mortals. If we allow our convictions to overrule our discipline, we’re headed towards the same fate.

If anything, such gigantic losses should, for once and for all, put a damper on conspiracy theories of market manipulation. After all, if someone can’t bully a market with a few billion, then the market is indeed bigger than anyone and everyone.

Source: Wikipedia

What lessons do you draw from this?

Comments

[Guy1]

I think it would be interesting and informative to juxtapose the trading losses graphic with a 10 largest trading gains.

I wonder how many of the largest winners were derivatives.

I bet some folks are very good at juggling flaming chainsaws!

[VicVolability]

I take away from this the same lessons I got from the movie Rogue Trader (the story of Nick Leeson and his employer, Barings bank; a must see for all investors/ traders) and every good book on trading I've read. Set my loss stops at the time the trade is entered and honor them as I would a promise to God. Don't just "accept" small losses, rejoice in them. I am preserving my equity to be able to fight another day. After a series of losses, STOP TRADING! Take a "time-out", study my bad trades, allow the wounds to heal, while perhaps re-reading O'Neil, Elder, or Landry. Resume trading in small steps; Don't fall prey to "the gambler's impulse" to bet bigger to "make up the losses". That is a real loser's game, whether trading derivatives or anything else. Proper money management will not guarantee success. Nothing does. But it will help me to survive. And that is half the battle in this business.

[H.W.]

this should be good for us to learn from past mistakes. instead of "honouring" these rogue traders, are they already behind bars?

[Wisdom-Seeker]

Also worth noting that in at least 4 of the 10 cases (Barings, Orange County, LTCM, Amaranth) the trader's organization went bankrupt as a result.

And that with 4 of the 10 cases occurring within the last 2 years, it's clear that the organizations still haven't learned how to tame their risks, despite the 6 big cases from the 1990s.

Which makes another reason to be fearful rather than greedy just now - with the market just a few ticks from having the bottom fall out again, the risk of another "rogue trading" scandal playing into a market panic is still there.

P.S. If you count up the 'non-rogue' derivatives trading losses, what do you get?? :) The lower tranches of all the securitized debt vehicles are essentially derivatives too.

[helplessobserver]

I agree with Vic and tell new investors that capital preservation is rule 1, 2 and 3. The nicks hurt, but you must be ready to play when opportunity knocks. Up trending dividend paying stocks are least likely to disappoint, but once the trend changes don't hesitate to bail out.