May 2, 2012

Chapter 3 Case Study: Trading Scandal at Société Générale


1. Peter Gumble, European editor for Fortune magazine, comments, "Kerviel is a stunning example of a trader breaking the rules, but he's by no means alone. One of the dirty little secrets of trading floors around the world is that every so often, somebody is caught concealing a position and is quickly - and quietly - dismissed... [This] might be shocking for people unfamiliar with the macho, high-risk, high-reward culture of most trading floors, but consider this: the only way banks can tell who will turn into a good trader and who even the most junior traders to take aggressive positions. This leeway is supposed to be matched by careful controls, but clearly they aren't foolproof." What is your reaction to this statement by Mr. Gumble?

Answer:

Different fields in trading is a full of opinions about the right way to trade. We should focus on our own instinct and ideas. If trading is as much about self-development as it is about having a proper profit and loss statement, then as a trader you need to rely more on your individual perspective than on collective opinion.

2. What explanation can there be for the failure of SocGen's internal control system to detect Kerviel's transactions while Eurex detected many suspicious transactions?

Answer:

SocGen had an image as the best French banking. What is striking here is the contrast between the mediocrity of the trader and the scale of the catastrophe. And when the heads of SocGen discovered this, they could not believe this one man had managed to do so much, so surreptitiously.



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