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Comment by gwern | Hacker News Reader

> When the bet backfired, Rochdale was on the hook for $5.3 million of losses on the extra 1,623,375 shares, leaving the Stamford, Connecticut-based company undercapitalized, the SEC said in court papers.

That actually sounds like an incredibly small loss, overall.

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You're right. It's about $3.3 lost per share, which is a loss smaller than 1% of the share price.

This is exactly why I don't try to play the stock market (or the Bitcoin market).

From a press article on the 25th it sounded like the price dropped suddenly but then quickly rebounded to "nearly break-even". I guess that "nearly" was the problem.

Is there a particular reason why the trader couldn't wait it out another day or two to see if he could make up the difference? I suppose with the money tied up in stock the company no longer had sufficient liquid assets to continue operating.

The article wasn't clear, but it sounds like his intention was to pocket the 'winnings' for himself somehow?

Wait it out? That's what every rogue trader says. Or they double up. Someone on the other side will be asking for their money.

This is the main thing I got out of this story when it first broke.

The firm was able to buy over a billion dollars worth of stock but was undercapitalized after incuring a loss ~5MM? Just doesn't make sense.

It might make sense if you're a pure middleman. If all gains and losses are your customers' problems and you're just using their bank accounts, you only need money to cover your own overhead and maybe cover fees before you can charge your customers (imagine you charge your customers monthly but the stock exchange charges you daily, you'll need 30 days' of fees on hand to pay the exchange before you then get reimbursed at the end of the month).

Along comes this trader buying on behalf of the company and not a customer, and now they're stuck with a $5m hole and that was all of payroll for the year etc.

Its the difference between the purchase price and the settlement date. I've got no idea what really happened but can speculate that what happened was that an order to purchases 1.625M shares goes in, (that will cost $1B), the trades are recorded people who've sold get notified they sold @ $xx etc. Now the trader was hoping the price goes up by a few $, then sells again. Now if everything "works as planned" when the trades are settled at the end of the day the people who bought put their money in the people who sold get their money out and the left over is in the bank.

But if you buy the shares in the morning and the price goes down, if you want to 'hold' and wait, you need $1B to cover the purchase of the stock, but if you want to 'cut your losses' you just sell the stock again for what ever you can get before the markets close.

I'm guessing this was what happened, and at the end of the day the difference was $5.3M which the company had to come up with to balance their accounts. That left them with not enough money for day to day operations, poof they are dead.

Was that really his game plan?

    1) Buy $1B in Apple shares.
    2) ...
    3) Profit!

If you have $1B to spare, it seems like there are a lot better ways to make money.

No his plan was 'borrow' $1B for a very short period of time, buy $1B in Apple shares, hope they go up a short while later, sell shares, pay back loan, pocket the difference. He never had the $1B.

That's what traders do all the time. The only difference here is the borrowing wasn't authorised and he fraudulently claimed it was. Oh and then it seems he committed a further fraud to attempt to mitigate the loss by forcing the price up or something.

If he hadn't lost, would this scheme have gone unnoticed?

Somebody once said that the fact you never saw a headline “rogue trader causes $1B in profits” was evidence that such schemes did indeed go unnoticed unless they caused losses.

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