Fat Fingers and Operational Risk

Citi trader loses bank $50 million. [The Rude Awakening] October 03, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Sean is at the Paradigm Shift Conference in Las Vegas, so here's a Rude from back in the day for you to enjoy. He'll be back live Friday with a report on the conference. Have a great day. --------------------------------------------------------------- Fat Fingers and Operational Risk - Citi trader loses bank $50 million. - Even adjusted for inflation, I never had an error that enormous. - Its dangerous to trade large orders during the early European hours. [URGENT: Unclaimed Giveaway Offer]( We have an item of considerable value on hold for you in our warehouse. Valued at nearly $300, this [special item]( is an opportunity you wanted to miss. [Click here to see how to claim yours now.]( [Click Here To Learn More]( [Sean Ring] SEAN RING Let’s get our cup of coffee and sit down. I’ll share my horror stories of fat fingering a trade as a broker with you. Every time I read about banks losing huge sums because one of their brokers did something they shouldn’t have, I mildly wince. I wince because I’ve made every mistake in the brokering book. But luckily for me, a decade and a half have passed since I was a broker, so the pain is mild. Before we begin, let me tell you why I’m writing about this today. Citi Trader Adds Extra Zero To Order; Loses $50 Million A Citi trader fat-fingered an extra zero onto a trade about a month ago. This sent the OMX Stockholm Index down over 100 points. From [Zero Hedge]( Fast forward to today when we find that said shitty math'ed fat-finger will cost Citi losses of at least $50 million, according to Bloomberg, while adding that the bank is still tallying losses from the mistaken trade and the final figure could balloon even higher. As we also reported before, the fat finger took place when a trader in the firm’s Delta One trading unit in London was working from home during a bank holiday on May 2 when the person incorrectly added an extra zero to a trade early in European market hours, sparking a furious five-minute selloff in the OMX Stockholm 30 Index which quickly spread across markets from Paris to Warsaw, wreaking havoc and wiping out 300 billion euros ($322 billion) at one point. [The rude] Credit: [Zero Hedge]( A few words from me on this. Luckily, I was only a futures broker, so it was next to impossible for me to lose that kind of cash accidentally. My most significant error cost $125,000, and I’ll never forget it. That amount is enough to get you in the boss’s doghouse, but not enough to get you fired. At least the first time. However, a $50 million mistake will get you fired immediately. I’m sure this broker didn’t mean to make this mistake. Adding an extra zero when typing in a trade is surprisingly easy. But clients trading this amount early in the morning, before the market is liquid, seems dumb to me. [Warning: Could Massive Civil Unrest Come To U.S. Cities In 2023?]( The streets are mayhem… Everyday supplies at the grocery store are cleaned out… In the parking lot outside, you see a large guy yelling at an elderly man… The big guy has something in his hand, and rage in his eyes... Things look like they could get out of hand at any moment. Is this disturbing scenario set to play out in U.S. cities across the country? [Click here now for an urgent warning from a former advisor to the CIA and Pentagon](. [Click Here To Learn More]( Why You Don’t Trade With Low Liquidity, Unless You Want To Set Off An Avalanche I’ll never forget this one time when a hedge fund manager called me up. He said, “Sell 2,000 10-year futures at market.” A market order is when a client specifies only the trade volume, but not the price. Market orders incur “gap risk,” which means the markets can move far from the initial market price. This happens when the market is illiquid. As a broker with a fiduciary duty to my client, I said, “It’s 6:30 am London time, 1:30 am New York time. There’s no liquidity in the market right now.” “JUST SELL THE GODDAMN THINGS!” “Ok.” I sold 2,000 10-years and sank the market one whole point. (It’s an enormous move in that particular market.) As a young broker, I didn’t divine that this client wanted to tank the treasury market. This client intended to set off all the sell stops to shake the weak longs out of the market. It worked. You see it all the time in the gold market nowadays. But most of the time, big moves like this are an accident. What Operational Risk Is And Why You Can’t Get Rid Of It The Basel Committee on Banking Supervision defines [operational risk]( Operational risk is defined in the capital framework as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This definition includes legal risk but excludes strategic and reputational risk. The “people” part is the problem. And not just because people still input trades. People create processes. People build systems. And people can’t foresee the unforeseeable external events known as “black swans.” Now you may say, “Well, just be more careful!” Sure. Valid point. But things get dicey when a client is screaming down the phone to get his trade done. And sometimes, shit just happens. I’ll never forget when a trader blew up the German bond futures market. I was sitting at my trading desk with my feet up, as it was that quiet. The next thing I knew, my dealerboard lit up like a Christmas tree. At first, I thought it was a malfunction. But then I saw my biggest client’s button flashing. I picked up the phone. “What happened to the bunds?” They had fallen off a cliff. I had no idea why, but I said, “Institutional selling out of New York.” I always said that when I didn’t know precisely why something was happening. I stood up from my desk to see my colleagues also standing up with their hands in the air. No one knew what was going on. About two weeks later, we found out it wasn’t a fat finger. It was an errant tray. This trader was under a bit of stress. Allegedly, his wife was pregnant and imminently due to give birth. His dealerboard was flashing her phone number as he was coming back from lunch. He caught the blinking button as he came around the corner with his lunch tray. He put the tray down to pick up the phone. It was his wife, calling to say everything was ok. Except it wasn’t. This trader was looking at his screen, seeing the German bond market tanking. Since he was the German bond trader at his firm, he was puzzled. Until he realized he inadvertently set his lunch tray down on the “sell” button. Oops. He had sold nearly a quarter of a billion German bonds in a few microseconds. His bank was sympathetic and didn’t fire him. Ah, the good old days. Wrap Up The only reason why I don’t mind reading about other traders’ misfortunes is that I didn’t do it this time! But these are the kinds of problems banks have been trying to solve for a long time, without much success. “Measure twice, cut once” works for tailors because they don’t have their clients screaming down the phone at them, “WHERE’S MY GODDAMN SUIT!” It’s much different when dealing with hedge funds, asset managers, and other banks. In the meantime, bathe in your schadenfreude. The so-called Masters of the Universe screw up regularly, with enormous consequences. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… September 2023: Monthly Asset Class Report [Sean Ring] SEAN RING It’ll be Monday by the time you read this, and I’ll be in Vegas by then. But I thought I’d have trouble writing this on Sunday night, so I woke up early on Saturday morning to sort this out before I travel. I’m glad I did. Did gold take it in the nutsack this week, or what? Down nearly $80 on the week and almost $100 on the month? What a mess… Silver, of course, didn’t do much better. But that’s because the market has finally cottoned onto the fact that Jay Powell isn’t pivoting until Jay Powell is good and ready to pivot. The 10-year yield jumped, and the dollar index along with it - that’s not good for precious metals. Stocks also had a crappy time, with both the SPX and the Nazzie down. But the Russell 2000 was - as is - performing worse. And the Russell is the one I’m worried about because those companies don’t get mate’s rates at their global banks. That is, the Fed’s rate hikes will hit them first. And bonds? Another 18-car pile-up. While they finally offer decent returns, do you want to buy them when Jay Powell has his hiking boots on? And how about oil? Think a $90 barrel tells us inflation is gone? Me, neither. Without further ado, let’s get into the charts. S&P 500 [RUDE 1] There were four consecutive down weeks for September for the SPX. It was an ugly month. While trading below the 50-day moving average, the 200-day moving average is still upward-sloping. I’m not sure we’ve got much more downside from here, especially if we bounce off the 200-day MA in the next couple of weeks. I’m not saying the economy is good. But I’m no longer sure Jay Powell will be happy to see the SPX fall off a cliff. Nasdaq Composite [RUDE 2] We had another few down weeks for tech stocks. As my friend and colleague Dan Amoss has been saying, there’s a rotation out of tech and into safer stuff like US Treasuries. Those USTs are yielding a decent return. However, I’m unwilling to write off tech yet, especially if the AI revolution firmly takes hold. Russell 2000 (Small caps) [Rude 3] This is still the chart to watch. Since most of these companies couldn’t refinance when rates were near zero in the capital markets, they’ll be the first to feel the pain of Powell’s harsh rate hikes. Last week may have been a respite… or a turning point. The probability lies with respite. If we continue the down leg, the next level is 172.5 (the previous low). Below that, we’re at 162.5 (the level at which we looked like we put in a double bottom). The US 10-Year Yield [RUDE 4] Okay, the 10-year continues its rise, and I don’t think it’ll go anywhere but up for the time being. The Fed has lost control of the long end of the yield curve, as most central banks do during hiking cycles. Why? Because they go too hard for too long. This time is no different. Until Powell signals his pivot, yields will continue to rise, and bonds will continue to be routed. Dollar Index [RUDE 5] While I was incorrect about Powell hiking in September, I still don’t think he’s done hiking yet. And neither does the market, methinks. We’re now above the previous cycle highs. Next stop: 108. Above there, 111, and then onto the 114 highs. But if Powell signals a pivot this month, we’ll be below 100 quicker than you can say, “quantitative easing.” USG Bonds [Rude 6] I called 90 last night, but off the cliff we went. There’s a real issue here: bonds now offer good returns for the risk. But why would you want to own longer-dated bonds when the Fed has long control of the long end? This may be the bottom here (for a while, at least). If not, see you at 80. Investment Grade Bonds [RUDE 7] After being rangebound between 103 and 108 for the entire year, we finally got our break to the downside. Next stop: 96. High Yield Bonds [Rude 8] I got this wrong last month. We didn’t head up to 77; we got crushed back down to 73.72. The HYG bounced off its 200-day MA, which is a good sign. The odds favor a down move in the short term. 71.5 it is. Real Estate [Rude 9] Wrong on this one, as well. The real estate market doesn’t like Powell’s hawkish talk. The VNQ got crushed that week, down nearly 8%. We could reach 72, but the damage is done for now. We’ll see a bit of a recovery, but not much. [New AI 62 Times Smarter Than Einstein?]( [James Altucher]( AI is already 100,000 times faster than humans are… And by 2025, Elon Musk predicts AI will also be “vastly smarter” than any human. Masayoshi Son, the CEO of SoftBank goes as far as to predict that, over time, AI could reach an IQ of 10,000… That would make AI more than 62 times smarter than Einstein’s IQ of 160. Can you imagine the possibilities of an AI supercomputer which is 100,000 times faster than any human and has an IQ of 10,000? [Over time, AI could be used to cure cancer, enable a new age of space travel, and much, much more](. That’s why AI is set to change the world in ways almost nobody can imagine today. And anyone who invests now – while this new technology is still in its infancy – could see the chance at making generational profits. [Click here now to see the 3 tiny AI stocks we believe are best positioned to profit](. [Click Here To Learn More]( Energy: West Texas Intermediate (Oil) [Rude 10] A big move in oil, up to $90, as inflation is still with us, and the Russians and Saudis tighten up the oil spigots. I can easily see a move to $120, even with dollar strength. But first, 107.50. Base Metals: Copper [RUDE 11] I had 3.60 in my call. It got close but rallied to 3.74 in the month's final week. The price looks depressed, so I’ll keep my 3.60 call. Past there, 3.35. Precious Metals: Gold [Rude 12] Seven consecutive days of crushing selling to close out the month. This is the second-worst month of the year for gold. February was the worst month. We were down $79.50 this week and $99.80 in September. The technical outlook has now changed. I expect a further fall to $1,820 before rebounding. As the Fed keeps hiking rates, it makes holding gold less attractive. Precious Metals: Silver [Rude 13] As with gold, silver got crushed in the last week of the month. While rates make holding precious metals unattractive, the silver chart doesn’t look as dire as gold. Yet. Cryptos: Bitcoin [Rude 14 ] Bitcoin was up a bit this month. But that’s not enough to move the needle into the firmly bullish camp. The 50-day MA says down. The 200-day MA says up. Let’s see. Cryptos: Ether [Rude 15] Even though Ether had a nice week to close up the month, I’m still unimpressed. Probably heading down from here. Trad Asset Class Summary [Rude 16] The USD was up again this month, moving up 1.56%, nearly the same as in August. Commodities were pancake-flat, up just 0.06%. The SPX was pole-axed, registering a -5.04% return. And once again, bonds stunk up the joint, getting crushed to the tune of -5.48%. Crypto Class Summary [Rude 17] Most big coins recovered somewhat after the abysmal month crypto had in August. No one shot the lights out, but the returns were solid across the ecosystem. The only coin we tracked that was down was Dogecoin, Elon’s favorite. Though, it only fell 2.66%. Wrap Up Gold and silver fell off a cliff, thanks to the market finally believing Jay Powell. Stocks and bonds got hammered. Crypto was up small. Oil is ripping higher. Enjoy those inflationary price hikes. Finally, let’s take a moment, in memorandum, courtesy of the Twitterverse: [Rude 18] Credit: [@SallyMayweather]( Have a wonderful week ahead! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We allow the editors of our publications to recommend securities that they own themselves. However, our policy prohibits editors from exiting a personal trade while the recommendation to subscribers is open. In no circumstance may an editor sell a security before subscribers have a fair opportunity to exit. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. All other employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. Please read our [Privacy Statement.]( If you are having trouble receiving your Rude Awakening subscription, you can ensure its arrival in your mailbox by [whitelisting Rude Awakening.](