Most people are missing an important point. From FT Website:
> That prompted Nasdaq to cut the entire trade on Wednesday and the exchange confirmed that the loss accounted for all of the exchange’s own default fund of €7m and swallowed €107m, or two-thirds, of its €166m mutual default fund that clearing house members must contribute to.
So a single, one person trader was able to basically bankrupt the Nasdaq insurance fund. This fund is supposed to cover all of the margin trading misfortunes but a single guy/position took it all away.
This means that the Nasdaq (and probably any other exchange) is not ready for a volatility event. In the case of extreme volatility, the Nasdaq insurance fund will be 0. Counterparties in derivatives won't get paid, and potentially the mutual funds/etfs/other structures depending on these derivative trades will collapse.
The next financial crisis is just one trade away.
Edit: re-reading and searching further, it looks like the fund that was depleted was not that of the Nasdaq but rather a mutual fund for several exchanges. The Nasdaq had only 7m euros. What a joke.
> This fund is supposed to cover all of the margin trading misfortunes
The fund is a first line of defence once a member’s assets fail to cover their exchange obligations. It is intended to quickly deliver capital to avoid market disruption. After that, there is a waterfall [1] which essentially comes down to Nasdaq’s members footing the bill.
Mutualised losses were the original model. It took time to activate, however, which in a T+1 or 2 settlement world is likely to cause = disruptions. The fund was implemented to provide a fast intermediate short-stop for medium-sized (i.e. big, but not systemic) losses.
This is peanuts and the system worked as intended against single investors not able to clear. It's the systemic risk that causes large crashes.
Systemic risk comes from a instrument that creates instability and flies under the radar. You can't get solid statistics to estimate the risk for the system as a whole, but everybody is doing it. It's usuaully good idea in microlevel but when everybody does it for leverage, it becomes a systemic risk.
Today margin debt – investors borrow against their portfolios – creates liquidity out of nothing. Securities based loans (SBL's) aka "shadow margin" is the most likely suspect for the next market crash. Brokerage firms entered the leverage markets the same way insurance companies did in 2000's
When you have lots of assets, you can take a loan using them as collateral, typically 70-80 percent. That type leverage has provided massive profits in the last 10 years.
Property markets are also connected to shadow margin. Million dollar apartment in San Francisco allows investors to save their cake and eat it too. They bought property and invested in the markets at the same money.
When property values increase, there is more money to invest in stock markets. When the the value of stock portfolio increases, there is more money to invest in the stock market.
It goes up and up until there is perturbation that causes margin calls. Margin calls cause prices to drop and they lead to more margin calls and investors are forced to sell. Then enough people have to sell their properties to cause property values to drop and more margin calls follows.
You're saying he traded directly with Nasdaq, not through a prime broker or corporate entity?
For your average reader, most funds don't have an account directly with the exchange. They go to a Prime Broker such as GS, JPM, MS, etc, who keep an eye on the exposures of their accounts and limit what orders can go into the exchange. So for instance I ran a couple of hedge funds, and we'd get risk reports from the PBs which told us how much they were willing to let us trade. Also they'd do things like allow you to cancel risks across accounts if you owned a stock in one place but were short another. And they'd have risk models that looked at how correlated your positions were.
Now that's not to say that Nasdaq can then just be reckless, but normally the PBs are very large banks that have capital requirements, and even if things go badly, chances are someone will decide they're too big to fail.
PS. This PB thing can go wrong as well, but the idea is there's a degree of containment and incentive to keep things sensible. The senior guy at one of my PBs was fired because he allowed an Arab sheikh to gamble with too much leverage, and the sheikh lost hundreds of millions and ate up the bank's capital. (You're supposed to ask for enough margin that you don't lose your own money.)
Yes, as I also understands it he was a direct member of the exchange. When this happened he owned 23 Twh of nordic and 11 TWh of german power derivatives contracts. That is 1/4 of Norway's consume in 1 year: https://www.hegnar.no/Nyheter/Energi/2018/09/Derfor-tapte-Ei...
This makes me scared too. When a single guy's positions can wipe out two thirds of the obligatory default fund, it seems to me that there is a mismatch between the risk allowed taken by exchanges and the amount of money they have to put towards the fund.
That us a fantastic point. When real problems occur they will be measured in the billions not a couple million. Clearing houses are expected to handle counter party risk but this event makes it clear only bailouts could handle a true crisis.
I wouldn't exaggerate the impact though. The financial impact to the derivative counterparties would be only by how much the market moved since their last collateral call. The impact of not being paid that movement on the ultimate consumers of these derivative shouldn't be huge. All it means is that they have a naked commodities, equity, interest rate or fx position when they were hedged before.
The systematic risk I assume must be more around the financial stability of the intermediaries who have large matched position but can't survive a large directional movement should there be a mismatch. I am thinking brokers, leveraged hedge funds or investment banks.
On Jan 15, 2015, the Swiss Franc was de-pegged, and several large brokers went more or less bust. Some of the biggest banks got stung badly.
The damage happened largely because in-the-red smaller traders couldn’t meet their margin calls, so the bigger parties took the hit. I see no reason that an event just 10x as bad couldn’t have bankrupted the big players.
Working at one of the top 5 members of that clearing house in Scandinavia, very few people I've spoken to about it at work earlier this week thinks he is actually bankrupt. He's filing for bankruptcy so that he won't have to cover his own loss.
Is that even possible under Norwegian law? To my understanding, Aas has been trading as a private individual, meaning not through an LLC (an AS in Norwegian terminology). If the rumors I'm hearing are correct, this was in order to avoid publishing his trades and profits, which he would have been required to do if he was trading through an AS.
Personal bankruptcy is a very pietistic, convoluted procedure in Norway. It requires giving up all your assets and surrendering all of your income (above a sustenance limit) to creditors for five years, and can only be done once in your life. If Aas is going this route, he will not be able to save any owned assets from the proceedings, and will more or less consent to being a debt slave for the next half-decade. That's an extreme measure that people only do when there is no other option. (The default option being to just not pay anything and leave creditors hanging indefinitely, with the expected consequences for any personal financial endeavor in the future).
So at most this is a play to negotiate with creditors, if the understanding I have is correct. There would be no way to save any assets if actual bankruptcy is the chosen move.
You seem to know a lot about this, though, given that you work with this. Are there some facts here that I'm not aware of?
Would this cover assets not directly owned by him, or assets owned abroad etc ? some loophole which would allow him to retain some chunk of his wealth?
While it likely that it is negotiation tactic, it has to believable one for creditors to think he may actually follow through, otherwise there is no point.
I am aware of no such loopholes. Foreign assets can of course be hidden from the authorities, but they will be confiscated if discovered. Any shares in companies or properties will be confiscated and liquidated, as will any payouts from life insurance policies and such. (Unless I'm very mistaken, all income counts).
As will any primary residence if it has a higher standard or price than the sustenance minimum, any vehicles not required to perform work, any household items beyond a minimum of ~$10k
or so in value. It's quite harsh.
If married, the spouse can keep 50% of any assets that were jointly owned.
I don't think there's a requirement to publish a list of the actual trades performed, but I get the impression that the reporting requirements are more detailed than just a profit/loss number.
For private individuals, the only public piece of information that will be reported is the amount of tax paid, and the net assets of the individual.
I thought a bankruptcy procedure is about distributing the remaining assets to creditors in an orderly and fair way. How can this prevent him from losing his assets?
You're mostly right, but there's probably laws governing exactly what assets are redistributed to the creditors. Maybe he is able to stash some assets with his wife or in some complex offshore setup. You'd need lawyers to say. Or the bankruptcy court even.
There was recently a high court judgment in Norway with Alexander Vik who refused to pay for a large currency trade. He tried for years not to pay and even moved his values over to his family, but at the end he lost in court and the money was claimed from his relatives.
He might have put a subset of his assets in a foundation, which is not included in bankruptcy (as he no longer owns the assets -- the foundation does).
Foundations however, have no owners (generally only beneficiaries), so they often cannot be held liable for the debts of the (original) founders.
I often wonder why people who have so much money already gamble like that to get even more money. If I had roughly a million dollars I'd put it in an index fund and live a happy live without having to worry about work or money. Yet people like that guy have a hundred times more money than I'd need for the rest of my life and risk it all to become even richer.
First, it is a game. The one with largest number "wins". Second, people do not see how much more wealthy they are than most others. They see how much less wealthy they are to the ones having bigger jets and charity programs and whatnot.
Yep. Hedonic treadmill. It’s a nice theory/observation to summarize this behavior. It is amusing to note despite having more, less, or almost zero dollars, it doesn’t seem to make folks much happier. Hmm.
"almost zero" is exaggerating. When humans worry about basic needs like food and shelter this makes them notably unhappy. In many countries even a basic full-time job might not alleviate poverty enough to take you up to this line where your basic needs are met and the Hedonic treadmill kicks in.
And in the Industrialised North lots of people actually live _below_ zero, with consumer debt at unprecedented levels.
First, he likely got that wealthy by taking aggressive positions. Meaning he is comfortable with it.
Second (and this is obviously an extreme example). Say I have $50m. I borrow another $25m. I put all of that money in a single concentrated position, that is very likely to go up (i.e. Amazon). It doubles in a year. Now you made $75m (excluding some interest payments).
Obviously, there is a limit as to how much money a single individual can have - It doesn't need to be written into law. Wealthy individuals are a flaw of capitalism and the system will always keep trying to get rid of them.
If someone has too much money, working people will stop trying to produce goods and services for each other; instead, they'll focus all their attention and energy on trying to extract money from the rich person.
That's kind of what happened with the tech industry in the past few years; nobody is really trying to provide value to regular people (that's just a pretext); instead, everyone is trying to extract value from rich investors; that's where the money is.
If you want to make money, why bother go after regular people who don't have much? Our whole economy today is built around fooling rich people out of their capital.
Which is easier; 1. To convince 100K working class people to give you $10 each in exchange for 100K units of goods/services or 2. To convince 1 wealthy person to give you $1 million in exchange for a 4-slide pitch deck and a speech that you put together the night before.
You are describing a self regulating system. In your opinion the problem is that some people have too much money, so why do you see as a problem the fact that the system is actively working to transfer this money elsewhere?
> the fact that the system is actively working to transfer this money elsewhere?
A one-guy example vs. "the system" - which overall clearly works towards concentrating wealth, not towards distributing it. https://www.economist.com/finance-and-economics/2014/11/06/f...
Or do you really see "the system" (especially when left alone) work towards spreading wealth away from the rich? Even just away from the concrete person who are rich right now, to new people, even if the overall distribution remained the same. As far as I know not even the second option is happening, being rich seems to be very much "genetic" (in quotes, of course), to different degrees in different countries but even in the best of cases a clear trend.
In any case, I'm a little confused about who meant to say what and whom I should be responding to since it was the OP who wrote
> Wealthy individuals are a flaw of capitalism and the system will always keep trying to get rid of them.
EDIT^2: Before anyone else mentions it, I find discussions such as these silly: https://www.pbs.org/newshour/economy/is-increasing-income-in...
To me this is a discussion about how wet water really is. With tens of millions uninsured, articles like this: https://www.theguardian.com/world/2017/dec/01/un-extreme-pov... -- I think discussions like the linked one are like discussing if there really is more or less water coming through the leak in the roof (or the ship's hull). Overall, over longer periods, the problem does not seem to be going away one bit. Whether it gets half a percentage point worse or better depending on the measurement period and the measures chosen, so what. The main point remains.
People with that plan don't usually make that first $1M. It's the driven ambitious people who make that $1M fast and keep on going. Folks who think like you are too conservative to make sizable amount in short time, because they are too risk averse. In other words, what made him the first $1M also made him lose the last $1M.
Consider a gambler. He walks into a casino and has a good run at the tables. His 1000 turns into 10000. The success was so easy; surely it can be done again.
A funny thing happens. You're up 6000 now, but 6000 is a lot less than the 10000 from earlier. Now 6000 (6x your starting money) _seems_ like a fraction of what you _could_ win.
It's the human adaptability problem. It's also an ego problem. The next success should be bigger than the last one, or it's not exciting. And since you were so good that you 10x-d your money earlier, surely you can something-x your money again.
Now consider the conservative (limited?) mind. You walk in with 1000. You win 150. You go home, because you've gained 15%!!! (You never 10x your money. You never get a million.)
So that's the problem. The mind that knows when to stop stops so early that it never achieves something extra-ordinary.
Meanwhile I've done the math and 2 million USD would let me live my current comfortable middle class lifestyle (single and childless) indefinitely here in Montreal with excessively conservative financial assumptions, without earning income, and without drawing down the principal. That budget includes more than mere necessities, like vacations and tech purchases.
That's not my current net worth, to be sure, nor would I necessarily stop earning income if it were.
It's just a nice example to highlight of a world-class city that isn't that expensive all things considered.
It is considerably harder to make 2 million in Montreal than say London/NY/SF etc, with the high cost of living in these locations it is easier to spend as you point out. If you already had money the perhaps settling in a Montreal is a good idea, but to make that kind of money you will need to choose to live in a place where money is easier to make.
In my case, I have spent most of my life so far in places like those you listed and am a new arrival in Montreal.
But tech workers native to Montreal who consult remotely for SF/NYC tech companies or VCs after spending some years doing a US work stint for networking purposes can definitely build up savings rapidly. I know one such example personally.
How long did you assume you'd be living and how did you assume to store this value? Because if left on it's own, just 30 years from now these $2M will likely have much lower purchasing power (even if stored on savings account and even no black swan financial event happens during that time).
4% draw down on a stock index fund will likely pay 80k anually adjusted for inflation indefinitely.
At least, this is based on historic stock data However, I was taught in undergrad econ, that this 4% return above inflation is considered the risk premium, over what a CD would get you. So there is a real risk of losing everything. Which means hedging is a good idea, some of the money to buy a reasonable house, some %age of rest in bond fund, and quarterly rebalancing can go a long way to preserve a lot of wealth in a black swan event.
Yeah, it's more like 2M will let you live confortable indefinitely in 90% of future scenarios. So there is still an y% chance you might have to go back to work again.
Even if I get to that level of net worth - which, as I noted, I'm not at yet - I'd probably still have some earned income. I could just care much less about how much and could be a lot choosier about what work I want.
But if you had $2 mill to invest you wouldn't have it all in one concentrated index fund - you would have at least 50% in wealth preservation funds and diversified investments commercial property, overseas funds/trusts etc.
I have less that 10% of that in my investment portfolio and don't actually have a FTSE 100 tracker I have around 20 investment trusts and individual shares.
Yeah, needs to be invested, I agree. But can be done without too much risk. This does not involve drawing down principal, in other words it lasts truly indefinitely.
A million dollars at a conservative 1.5% after taxes and inflation would pay for all my current expenses. If I didn't have to work I'd likely move somewhere with lower cost of living.
If you were debt free with 1 million USD in cash and mutual funds would you choose to live in a major city? So many major cities worldwide have high levels of pollution which has a deletirious effect on both physical health and mental performance. You trade that off against having access to the things big cities offer (services, entertainment, etc). It might seem worth the tradeoff if you are single and don't want to own anything. But making that choice for wife and kid seems tough.
>>> If you were debt free with 1 million USD in cash and mutual funds would you choose to live in a major city?
Like everyone else, I don't get to choose.
Do you realize that people have roots, family, friends? Do you realize that border and immigration control is a thing? It's disingenuous to consider changing city as a trivial option.
When someone has $1M, it's because he is in a location that made it possible in the first place.
I am aware of all those things, because I did it. So I know it is not trivial; I'm not being disingenuous at all. I made the trade offs for my family. I am just wondering what other people's thoughts are.
FWIW that apartment in Oslo probably costs around $5M by itself. He also has several other properties around the country in the same price range. I would not be surprised if he owns real estate worth $20M+. Official numbers say close to $100M taxable income in 2017.
And still, personal bankruptcy is waiting for him now. I'm curious what kind of impairment (none? or tilt or insomnia or worse?) lead him to be this reckless, that he could lose more than what he invested.
It's leveraged. The gain or loss is a multiple of the difference, not necessarily linked to the initial sum.
He was probably betting a few millions on what appeared to be a relatively safe trade, then a rare succession of events lead to a 1:100 ratio in the other way.
That's not an excuse for engaging in a trade where one can lose that much. Both the investor and market should ensure there is an upper limit for what can be lost. The market to protect itself (since it or the the insurance mechanism lost > $100 million in this case).
You can't set an upper limit for what can be lost unless you force other traders to buy what a short seller is covering. Non-deliverable futures markets with no shorts are not possible, and it isn't practical to make every futures contract deliverable.
The price of electricity is only going to go so high, though. Without leverage, it's vastly harder to lose all your money on a short, because the asset has to double in price. In this case, the spread peaked at about 38:56. Without leverage he'd be down 10 or 20 percent.
You're being extremely dishonest with yourself if you think you won't blow through a significant portion of that million dollars if you were to get it. Lifestyle inflation is a force of nature my friend
My lifestyle hasn't really changed in the last ten years, while my income has increased by a factor of six. I'm pretty sure I wouldn't blow through the money, and I think I know myself better than you know me.
Aside from the risk of theft/fire etc, you're also running the risk of rampant inflation. You should have a variety of investments in different economies. If $bad_politician gets in and turns the US dollar into the Bolivar, your 10m will be worthless. If you've got 20% invested in other countries you're running a much smaller risk, likewise with investments in other assets
Don't put all your eggs in one basket, don't put all your files on one raid, and don't put all your assets under the mattress.
It gives you a great safety net. It lets you speculate in the great game. 9 in 10 ideas will fail, but that's ok as you won't end on the streets.
Those without the safety net have far more to risk, so are far less likely to succeed. For every richard Branson who starts up a company from the back of their van there's 9 who do that and fail, and are currently on minimum wage stacking shelves. For every millionaire actor there's a thousand waiting tables. For every musician there's 100 teachers. Very little to do with how good they are, all to do with the lucky break.
Hell where your parents live makes a massive difference. When you start out with a job in the big city, you either live rent free with parents and thus save £10-15k a year, or you put your entire wage to paying bills.
After 5 years you have 70k, enough for a confortable deposit on a house, or a few years of speculation, or investments that will grow to half a million by retirement.
If your parents don't live close to where you start your career you're far more hand to mouth.
Great for the long run, but they also have bad years. Global index funds also gave net 0% in the interval 2006 to 2012, since the financial crisis hit there.
Weighed up by good years giving far more than 7%, but one needs to have time.
You have to consider that not that few expenses can wait. Think of the new paint on the walls, or the new floor on the staircase. Or the new table, etc.
Worst case you'll be stuck in a minimum-wage like lifestyle. Best case you're on your yacht in the Caribbean.
I think it's the same personality-traits that made him this money that also made him lose it. Most people wouldn't do these "gambles", and thus wouldn't even ever be in a position to actually lose so much money.
If you're like this guy, and in your late 40s with $250m in the bank, you're going to be hard pushed to ever spend it. Betting it all on red seems ridiculous. Surely better to enjoy the benefits of it and leave his family set for generations. Keep $20m for silly bets, and cover your trades. :)
Makes me think of Elon Musk putting the majority of his PayPal sale (>$100M) into new companies, which hired people and produced something of value that many are now benefiting from. One of which was motivated in part by eliminating carbon emissions.
Feels somehow ironic - this guy losing so much because surprise weather patterns filled up Northern Europe hydroelectric reservoirs, coupled with German carbon tax.
Perhaps karma builds up when you want to hoard and keep living with minimal risk.
Because it seems like you'll never need all that money to live, so you may as well invest/gamble it. You think you'll never risk your lifestyle as long as you only play with a certain pot, but then something like this happens.
My pet theory is that a lot of people who come into such money do so suddenly, and they don't appreciate the nature of the risk involved, on the upside or the downside. Huge wins are due to their genius, huge losses due to the market misbehaving.
Or as my father keeps reminding me, sell/stash half of it.
If you can afford to gamble half go for it if you want to, but if it goes all tits up you still can live off half of $X which in this case is a lot $$$!
You know what I would do if I had a million dollars? I would invest half of it in various mutual funds and take the other half over to my friend Asadulah who works in securities and…
He got it by gambling, he lost it gambling.
So what.
The sad thing here is that it is indicative of how extremely wealthy people often get that way. The system should reward innovation, hard work etc, but instead it is skewed towards gambling, system-gaming, rent-seeking and so-on.
It doesn't hurt that those lucky 10 also work hard. Or may be 9 of them do. Lucky wouldn't appear on your door.
Also, you gave the impression that the other 90 are losers because they work hard. Life is not an extreme. They may not become as rich, but they aren't poor either, and they maybe lucky in other metrics. They aren't loser.
Maybe some do. I'm lucky I don't know the meaning of the word 'work hard'. I'm sitting here on a sunday afternoon working, or rather waiting for things to go wrong. Sure it's a 12 hour day, but it's not hard working.
Those holding down two jobs and doing 80 hours/week of non-stop work on their feet filling amazon deliveries or cooking burgers or picking fruit for minimum wage know what working hard is. I doubt anyone ever became independently wealthy through hard work.
Is it right our society is set up to reward luck above all else?
Is someone making a career out of amazon deliveries or burger flipping or fruit picking really a good demonstration that hard work is not rewarded? That's merely hard physical labor. How about hard work like making sacrifices today so that tomorrow you're not competing in the deep end of the labor pool? I'm not sure that society is really just rewarding luck.
It's not just rewarding luck, but luck is a massive part. For every college dropout that goes on to form microsoft or facebook, there's 1000 college dropouts whose business fails because they weren't in the right place at the right time.
So, do you mean that the less wealthy people don't go for rent-seeking etc?
That's just bollocks. The system rewards innovation, not just that consistently and probably not that much. And people in all income classes behave the same way.
> The real wtf here is that he nearly bankrupted Nasdaq's emergency fund in doing so.
Nasdaq has several exchanges and clearing houses. This was only the found for Nasdaq OMX Commodities Europe[0]. A found only used for financial energy market for Norway, Denmark, Sweden and Finland.
Aren't you supposed to gamble with a fixed percentage of your money in case a long tail event happens? From an outsider's point of view, that seems like rule number one.
Questions about NASDAQ:
- What is NASDAQ? Wikipedia says they're a "stock exchange",
which supposedly means they provide a place for people to
trade in stocks and bonds and various other "securities".
- How was NASDAQ affected by this guy's decisions? Are they trading something?
One of the most important thing to learn when trading is risk management, how to preserve your capital. Being wrong is part of trading, staying wrong isn't.
It's especially interesting to see it happen to someone that actually worked as a risk manager in his early days ; especially so close to the anniversary of Lehman's demise.
> Aas bet that the spread between energy prices on the Nordic and German electricity markets would narrow.
I'm not super familiar with finance but this is a 'derivative' right? Is there a website where you can follow these types of large derivative investments? The type that gamble on market trends like this?
I'm curious what other types of things people are gambling large funds on. Or even large short positions...
I'm not sure about a website. A lot of the professionals seem to get data off Bloomberg. There's not so much coverage on the likes of Yahoo Finance. Also traders tend to be secretive about large positions.
But yeah I figured this type of thing requires some special access to see the trades. I have a feeling most EPAD trades are relatively boring, this one was just a unique large gamble.
Yes, specifically spread betting, which is illegal in the US, but more common overseas I believe, because it basically is pure gambling. The other variations that are legal in the US are futures and options, with the latter being the most similar to spread betting I think.
Futures is a market to reduce risk for commodities producers. Options are higher risk I want to say?
Search around Investodpedia for better explanations; really good site that one.
EDIT: or maybe the spread referred to in the article is on the options market. I'll have to reread.
Betting on a spread is not spread betting. You can but Coke and sell Pepsi, you then have a position in the spread. That's not spread betting, which is just a retail way to gamble on a price movement.
You cannot say options are more risky than futures, the two are related but different in nature.
Whether he implemented his trade in the options or futures is irrelevant, there was always going to be a blowout risk.
Risk levels are determined by two factors: how risky the asset is, and how much cash you have collateralizing the position.
Options in general are a way to transfer specific tranches of risk. There's lower and higher risk strategies - eg, if you do a "covered call" you're buying a stock and selling off the upside risk for cash today, and basically wind up with a less risky strategy than owning the underlying outright.
Futures are a specific market - forward contracts to purchase (long) or deliver (short) a specific product in a specific manner at a specified date, marked-to-market daily. The mark-to-market is important: if you're long a soybeans future and the price of it goes down, they debit your account the cash value of the price decrease and credit your counterparty's. This is why there are margin requirements: they're designed so that when a nightly debit happens, you will almost always have enough cash.
The spread is referring to the futures market. If you have offsetting positions, then many events that earn you money on one contract will lose you money on the other (and vice versa). Eg, if you are long two 2-year treasury future and short a 10-year treasury future, and interest rates for both rise 0.01%, then as of the last market close your 2-year futures lose $71.54 and the 10-year future gains $70.98. The market rules recognize that the spread is less risky than the outright, and thus requires less margin to guarantee your trades.
No, this is pretty much how coordinated transaction scheduling works with several of the power markets in the US like NYISO & PJM. You put in a transfer you want based on a certain spread between each market's price.
Living in Norway currently it is absolutely crazy to me so many electricity companies trading middlemen making money just by trading they don’t don’t produce or supply just pure middlemen. I heard of some scamming companies too. I just said no to a fixed price binding contract which would have been a disaster. Now I have the cheapest prices of the year so far! It is completely non Norwegian from my experience. Everything else is so monopolizes and controlled here.
> they don’t don’t produce or supply just pure middlemen
They produce liquidity and price discovery, which are extremely important. Most energy companies don't know what the "efficient" (market clearing) price for power is and also want to mitigate the risks they inherently face by supplying these markets. Speculators allow natural longs like energy companies to hedge risk (reduce their risk) so that they can focus on the things they're good at: building, maintaining and operating power generation and distribution. If you're not an expert trader, which most utility CEOs are not, how can you invest in projects for the next 5, 10 or 50 years without markets that allow you to lay off some of the price risk of the good you're producing (power). This dynamic is what is facilitated by so called middlemen. They are absolutely essential, even if there are spectacular failures like this from time to time.
It's not a scam, but you're correct that they don't produce anything physical. Their point is to mostly converge disparate markets. So if they notice a separation between day ahead and real time prices, they can make money off of that while helping to plug a hole in the market as that could be the result of bad data...etc. There is an on-going debate as to whether their involvement (most of the financial only players are banks) is really that helpful as it can cause other issues if they do a bad job and cause divergence.
Electricity provider market is an extremely dodgy one, e.g. in Germany one is receiving random scamming calls trying to make the victim change the electricity provider. One such scheme was revealed some time ago - someone incorporated in Germany and Switzerland, then hired German speakers somewhere in Serbia where the scamming call center was located. Plenty of dodgy entities profit fortunes while electricity cost for individuals regularly increases.
Happens in the US, too. About twice a year I get someone on the door here in NYC who says they're from ConEd (they're not) and want me to know I'm missing out on a huge discount that is mentioned on my energy bill but is somehow opt-in. It's all nonsense, but what they actually want to you to do is sign up for an ESCO, i.e. a third-party energy provider. These ESCOs are always more expensive than ConEd (which already gets its energy supply from some efficient bidding market), and basically amount to a scam. ESCOs work in other countries such as Scandinavia, but not as implemented in NY.
When you're young and you can absorb total losses, big bets (high risk/high return) are ok. Mid-life and beyond, it's nuts to be risked or leveraged to the point where you could lose everything.
I can't say how he thinks, but some people have earned or lucky successes that give them a sense of invulnerability... and then they take unreasonable risks. This seems like one of those cases.
How is this kind of derivative trading any different than online poker on credit? Turns out the other guy had the nuts, well sucks to be a norwegian tax payer I guess.
Yeah, sure we need liquidity and market makers do have a job, but this makes the nasdaq look like a mismanaged casino..
Attorneys drafting derivative contracts need boundary conditions so this doesn't happen. The boundary conditions would also signal to those who rely on them to get protection if a boundary is hit. Zero and infinity are simply ignored.
How did it happen that default funds of the clearing houses had to be accessed? Did the spread change in one day from normal spread to 17 times normal? Otherwise the margin should have depleted only his own money.
This was ultimately just a transfer of wealth between two parties. There wasn't much of a loss for society as a whole (besides maybe to Aas's creditors and the clearing house but they can handle this risk)...
The fund that got depleted has to be topped off again, with money from the other participants in the market. Fortum, for instance, will have to pay ~23M euro, and is largely owned by the Finnish state. Same goes for lots of the other players.
Honestly I dont understand why NASDAQ could be involved if he was trading european electricity. Even if he was trading ADRs they'd be on NYSE.. The article must be missing a few details.
debtors prison? i kind of like the concept of paying in real life for things like this. he gambled with somebody else's money. and lost. if he just goes bankrupt and gets debt payment assistence without suffering anymore consequence than having to live a normal persons life for once, its not quite enough for the damage he has wrought.
Historically, debtors prisons never ended up being for rich people who lost more money than they had, they always seemed to end up primarily with poor people who took out loans to stay alive and then couldn't pay back because they were unlucky.
Rich people are a huge benefit of the system. Think of Elon Musk putting his wealth into SpaceX or Bill Gates into charity work. The fact that people who've demonstrated the ability to successfully manage capital investment and innovation get to control more resources is a positive feature.
I don't care about SpaceX. It doesn't benefit me at all in any way. In fact, some of my tax money probably subsidizes those spaceships so that big telecom companies can launch their satellites into space more cheaply and juice more profits out of my current ADSL contract; which won't get cheaper.
I appreciate Bill Gate's charity work but I understand that it also doesn't benefit me personally - It probably costs me as well. Lifting people out of poverty means that they will be able to get an education to compete against me in the job marketplace in the future and will lower my wage. I can cope with that on a moral basis, but I'm pretty sure that Bill Gate's donations cost me more (in terms of how it affects my humble net worth) than it costs Bill Gates himself (in terms of how it affects his net worth).
If you are going to include remote effects like competition from poor people getting education, you also need to include an infinite amount of other effects; in particular world stability, the chances of terrorist attacks, 3rd world war, refugee crises, trade wars etc
With the technology we have now the world does in fact have plenty of resources to have basic needs satisfied for everyone (e.g., we throw away many times more food than what it would take to fix hunger). There is no actual need to compete. Such a world is safer for everyone, including the rich, and Bill Gates is one of many working long term towards that goal.
See lifting the poor as a rather cheap insurance against political instability.
We are always one major war or one generation away from having the entire system toppled, and the very meaning of "property rights" that make the rich rich overturned. Civilizations are not forever, whatever the people currently at the top may hope for.
Intentionally keeping the poor poor, and keep concentrating wealth, is not a recipe for stability.
SpaceX providing launch services significantly cheaper than their competitors has probably benefited you personally far more than those initial subsidies to SpaceX. In fact, the recurring subsidies to their competitor, ULA, are substantially higher.
Bill Gates is worth ~96B as of September 1st, according to Forbes. A report from last August noted he had so far donated ~50B. So, you would profess that the resultant effect on your employment market from Gates' donations has negatively impacted your salary by more than 50%? That sounds like a preposterous claim, but obviously one that cannot be proven.
As a software developer who works in Europe, a large proportion of my colleagues come from developing countries and they have a great work ethic, so it doesn't seem that far-fetched that the added competition would have a significant negative impact on wages in my industry across Europe.
I agree that it's very complex though and we can't really measure how much Bill Gates' philanthropy may have contributed towards this trend.
I just wanted to point out that good things tend to have negative unintended side effects. For every deal, there is always a winner and a loser.
Instead of "trickling down", a perfectly tight pipeline system was designed and build so that each single drop is taken care of... one can lick the pipes still.
I don't know, it's not even exactly clear to me what kind of trade was in play here. My point was, the other side probably wasn't Joe Average. IOW, while you can frame this as a rich man losing due to greed, that's just another way of saying some other rich person won big.
Exaggerating here, there were probably multiple counterparties and I'd think they were probably institutional investors, or maybe power companies.
> That prompted Nasdaq to cut the entire trade on Wednesday and the exchange confirmed that the loss accounted for all of the exchange’s own default fund of €7m and swallowed €107m, or two-thirds, of its €166m mutual default fund that clearing house members must contribute to.
So a single, one person trader was able to basically bankrupt the Nasdaq insurance fund. This fund is supposed to cover all of the margin trading misfortunes but a single guy/position took it all away.
This means that the Nasdaq (and probably any other exchange) is not ready for a volatility event. In the case of extreme volatility, the Nasdaq insurance fund will be 0. Counterparties in derivatives won't get paid, and potentially the mutual funds/etfs/other structures depending on these derivative trades will collapse.
The next financial crisis is just one trade away.
Edit: re-reading and searching further, it looks like the fund that was depleted was not that of the Nasdaq but rather a mutual fund for several exchanges. The Nasdaq had only 7m euros. What a joke.