How a French solo trader made a $6.6b unauthorised bet
A self-employed trader in France accumulated stock futures worth $6.6 billion in a single day, trading records show, raising questions among investors about how he could build up such a large position despite having only 20,000 euros in his account.
Financial industry safeguards have been tightened in the 10 years since rogue trader Jerome Kerviel lost 4.9 billion euros ($5.7 billion) at French bank Societe Generale and internal controls at financial firms are meant to prevent individual traders taking such large positions.
But Harouna Traore was able to buy 43,941 S&P500 futures contracts worth $5.3 billion and 34,388 Eurostoxx 50 futures contracts worth 1.2 billion euros on June 29 last year through London broker Valbury Capital, trading records reviewed by Reuters show.
When contacted, Traore, 41, referred to a court document reviewed by Reuters in which he confirmed the trades and said they had resulted from a mistake because he had initially thought he was trading on a practice platform where trading limits did not apply, rather than, as it turned out, a live one.
He is now suing Valbury Capital in a French court, alleging the broker has kept the $11 million of gains from his trades.
Valbury Capital referred questions to Robert Falkner, a partner at law firm Reed Smith which is representing the broker. Falkner said there was a contractual limit on Traore's account, but declined further comment.
A June 16, 2017, email from Valbury Capital to Traore, seen by Reuters, shows the French trader's 20,000 euro account had a trading limit of just 10 futures contracts per day.
"There was a mistake on his account," said Tarek Elmarhri, head of the Krechendo French trading arcade in Paris whose trading facilities are used by Traore and other day traders.
This meant Traore "could buy unlimited contracts" on the system he had only just spent eight weeks being trained to use, Elmarhri said. Traore asked Elmarhri to review with him the June 29 trading when he came back the following Monday to the Krechendo trading arcade.
In the risk parameters for Traore's account with Valbury Capital, according to a screenshot of the account seen by Reuters, the user credit is indicated as "unlimited" by the broker.
The huge positions racked up by Traore are many times above what seasoned traders at investment banks are routinely allowed to buy during a day of trading, Elmarhri said.
Britain's Financial Conduct Authority and France's AMF both declined to comment on Thursday.
Trading records reviewed by Reuters show Traore first traded Eurostoxx 50 futures contracts on the afternoon of June 29, a position which he closed before the European market shut, leaving him with a 2.4 million euro loss.
He then began trading S&P500 futures and managed to close his position with a profit of $13.6 million, although he could have lost between 100 and 200 million euros had stock markets fallen between three and four percent, Krechendo's Elmarhri said.
Traore lost 900 euros at the Krechendo arcade trading room on the morning of June 29, adding he decided to go home to practice on a training version of the platform.
This was when he built up the huge futures positions. He told Reuters that he only realised he was trading "live" when he saw he had reached losses amounting to a million euros.
"I thought that it was the end of my life. I thought how am I going to pay back all that?", Traore said, adding it was then that he decided to try to trade his way back to a profit.
Having succeeded, Traore stayed at home the next day.
"I was in shock," he said.
Traore said he received trading and settlement statements from Valbury Capital as usual the next day and had no other contact with the broker before he called them the next week to explain what had happened.
The trader said he had not been aware before making his multi-billion trades that his account allowed him to make unlimited orders and denied he knew he was on a live platform.
Elmarhri said that because Traore had settled his trades with a profit before any margin calls were made, his super-sized trading positions went undetected until the following week.
"This could happen again, current regulations are not effective", Elmarhri said, stressing that trading limits are supposed to be strictly implemented by brokers.
Traore worked from 2013 to 2017 for Thomson Reuters, the parent company of Reuters, his LinkedIn profile shows.