FT and LEX on SocGen Trading

The Lex column of the Financial Times provides the only quantitative information I have seen about the possible effect of SocGen trading on the equity markets during the tumultuous period of Jan 21-23. The most important new information here is that SocGen did this trading over a 3-day period, not in a single day.

Lex gives the timing and the estimated amounts of the trades. Here is the pith of their report (emphasis mine):

..starting on January 7, Mr Kerviel made a series of bets that Germany’s Dax index, the French Cac40, and the Euro Stoxx 50 would rise. He bought futures contracts, as normal, but did not hedge against market falls. (Hedging would usually involve selling the underlying shares, or over-the-counter derivative contracts with clients.)

Eleven days later, internal controls finally identified suspicious activity. By then the Euro Stoxx 50 had fallen by a cumulative 7 per cent, and the position had generated, SocGen has indicated, a loss of between €1.5bn and €2bn. This implies Mr Kerviel had taken a notional long exposure of €21-€29bn. The margin payments on this position might have been more than €1bn. This sounds too big to avoid detection, but may have seemed normal given the desk’s legitimate activity of very high volume and low- risk trades.

On Monday, a shaken SocGen began to liquidate the position over three days, bringing its total loss to €4.9bn. Did it move the market? Over the period the total value of trading in index futures and the cash market for the Euro Stoxx 50 was €544bn. That suggests the unwinding of Mr Kerviel’s rogue position accounted for 5 per cent or less of activity. Clearly a determined seller does not go unnoticed by traders in a jittery market. But it seems likely that the main explanation for the market rout in Europe was earlier sharp declines in Asia, general concerns over the US economy and specific worries about the monoline insurance crisis. One man damaged SocGen severely but it seems unlikely that he moved global equity markets significantly.

The fact that it took 3 days to complete these trades explains why SocGen was silent on Tuesday (and Wednesday) to their own shareholders, their own government, and to central bankers. Actually it has been reported that officials were told Wednesday before the public announcement on Thursday. Wednesday apparently was the first day that SocGen was out of the awkward trading position that young Monsieur Kerviel had put them into.

The 3-day trading period also means that SocGen’s trading volume was much less than on Monday Jan 21 that it would have been based on previous news reports.