How the trend made the largest UK bank bankrupt

Posted by OliverPearson 0

Nik Lison and trend

When an investor opens his first account at a brokerage company, he completely forgets what he learned from books.  The basic rule of any trading whether you trade currency, or stock, or futures, or options is as follows:

Trend is your Friend

When I read on the Internet about people who lost their money on the equities market, the story of trading against the trend that made the largest UK bank bankrupt comes to my mind.

How the trend made the largest UK bank bankrupt

This happened in 1993.  The top UK bank Barings appointed Nick Leeson as a trader of Barings Singapore. I should say he was a great speculator! His trades at the stock exchange brought 10%of the bank annual profit in 1993. Barings Singapore made $80 million in 1994, the half of which due to Nick Leeson. Naturally, the bank allowed him to trade any volumes and loosened its grip.

Barings

Before we go on, I should say a few words about Barings itself for you to understand its financial strength. The bank was found in 1762. It was one of the oldest commercial organizations in the country. Moreover, Barings was the UK’s financial gauge. The bank was so reputable that it was mentioned in the 19th and 20th century classic novels.

The Queen trusted the bank to make investment deals on her behalf.

Both the international rating and image were perfect.  Nothing foreboded that the bank could not withstand the ordinary trend on the securities market despite the state support and vast capital.

It all started with options, futures, and Nikkei, the Japanese index. 


An option is a conventional right to buy (to sell) securities, or other assets.  The term “conventional” means that you don’t buy the stock itself; you generate a profit from the price fluctuation within a set period. When you buy an option, you select a price rise or fall during a certain period.  After the option expires, you get to know if you are in profit or loss.

E.g.: You buy a PUT option (down, you expect the price to drop) on Apple stock  to the amount of $300 expiring after 15 minutes. If the price of Apple stock decreases even by 0.001 USD in 15 minutes, you make a 70% profit. If the price rises which means it stands against your condition, you lose money.

By the way, the world’s  top binary option broker won’t let you lose all your money in case you fail! AnyOption returns you up to 25% of your investment; no other binary option broker does it. The binary options are bought for a period of 5 minutes to a month.  The term in demand is 30 minutes. During 30 minutes it’s easy to catch the trend and make a 70% profit.

Investing $300 for half an hour, you can make a $210 net profit.  


A future is a right to buy/sell. Its features are similar to leverage used on the foreign exchange market. Indeed, you can buy $500 dollars for $5 on the currency market. In the same way, the futures enable to buy a large amount of shares for a little money. However, if the stock price moves to the opposite direction, then loss is withdrawn from your broker account.

On the foreign exchange market if you buy euro/dollar, and the exchange rate drops, the loss is withdrawn from your basic deposit account. There were many cases when people lost all their money just on a trade. The option doesn’t require any additional expenditures, and even in the worst case you lose only an amount you pay for the option.


A stock index is a price of stock in the aggregate.

For instance, the Dow Jones Industrial Average includes the top 30 companies like Coca-Cola, Boeing, Visa etc. To buy all shares constituting the index in the ratio set by the stock exchange, you need at least $6 million. A few traders have this amount of money, that’s why they buy a multimillion index for $200-$300.  The equities on the stock exchange influence the index price that has an impact on the price of futures, index futures, and options.


 

There was slack on the Japanese securities market when this story happened.

The Nikkei index traded in a sideways channel (flat). Nick Leeson used a hedging strategy, i.e. he used the strategy of simultaneous buying and selling of the options on index futures ensuring a good profit even in case of slight fluctuations.

However, a small earthquake in Kobe changed the trend from sideways to descending.

In this case, a disciplined trader had to close all orders to understand further market trend. Nevertheless, numerous financial gains and access to all Barings’ resources made Nick overconfident. He had the capacity of the world’s largest financial organization behind him. Nick wanted to show that this was him who moved the market, and the stock market didn’t move the bank’s trades.

Nick Leeson used Barings account to buy futures on the Nikkei index despite the stock market marked a downward trend.

Massive buying caused a rush demand for stock (the price looked low against rising futures) that began to rise. As the Nikkei index included equities, it also began to rise.  The stock market seemed to gain again, and Nick’s positions seemed to reach a breakeven point. However, he didn’t take into account a downward trend persisting for seven years.

When Nick Leeson stopped buying the index futures, the market crept down again.

Then, the trader reopened buying pushing the Japanese stock upward; however, after a little while, the Nikkei index resumed falling. Finally, Nick bought the largest amount of futures over the history of the land of the rising sun. And if he proceeded a little longer, he could even reverse the trend.

However, Barings ran out of money. The bought futures on the Nikkey index could be sold lower than the initial price because the market continued to go down. The result was unbelievable.  The losses reached $1.5 billion! whereas the own capital of the bank was just $600 million.

nik_lison

This case is like a motor vehicle accident in which you run into Ferrari. However, neither the price of your car nor your apartment does not cover the damage you did.

What next happened to the bank that dared to stand against the trend? The bank was declared bankrupt. Private investors of this bank lost their money.

Queen Elizabeth II and Prince Charles as bank’s clients lost about $2 million.

Four thousand employees lost the job. If you come to the UK, you won’t see anywhere a sign board of Barings which used to be on every corner.

Concluding the article, I’d like to draw your attention to the important point.  Do you know how long it took to blow off Barings’ capital accumulated over two hundred years? 2 years? A year? Some months? Nope. Just a month!

The same way you can lose your deposit in just a day that you accumulated conducting operations on the currency or stock market over some years. For this, you just need to trade against the trend.

nik_lison trend

P.S.: Nick was sentenced to six and a half years. While in prison, Nick published an autobiography Rogue Trader. The book became popular; however, the author didn’t get a cent.  The proceeds from the sale were used to pay the debt to Barings’ creditors.

In prison, Nick Leeson was diagnosed with colon cancer. Under the decision of the President of Singapore also suffering from cancer, Nick was released from prison after three and a half years there.

Presently, this great trader is not allowed to trade on the stock exchange. He takes part in conferences delivering reports in different countries around the globe andmakes up to $100 thousand.  Many people want to listen to Nick, that’s why there are lines of traders, businessmen and experts trying to buy a $300 ticket.

Watch an autobiographical movie about Nick Leeson Rogue Trader! This is an action movie completely absorbing the viewer.

«Money isn’t for greedy people»

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