If you haven’t read “Reminiscences of a Stock Operator”, you really should. It’s a thinly veiled autobiography of Jesse Livermore’s trading career, or at least the first twenty-five years of it, which were often wildly successful (the fact that he went bankrupt three times, while being able to come back every time during those years, is a story about how reputation might be able to protect you from the risk of ruin by enabling credit from peers). The book includes lots of small stories covering every aspect of the challenge of trading, both at bucket shops (the retail Forex brokers of the era) and at real high-end brokers on Wall Street. Livermore tells one story where a bucket shop was refusing to pay him for trades he had opened. He started yelling at the counter to close his trade and spoke about how at that moment every customer in the office paid close attention, because “asking for your money and not getting it from your broker is the civilized man’s hell”. He also tells another story about a broker who refused to pay out on a winning trade of his. “That was a fictitious market” said the broker. To which Livermore replied “It wasn’t a fictitious market when you let me in the trade, and once you let me in, you have to let me out. Can’t say fairer than that!”
These stories come to mind as I read about the dispute between London-based and FCA-regulated Valbury Capital and the French trader Harouna Traore. The case has been widely reported, but there is probably more to the story than has been revealed so far. In a nutshell, it seems that Mr. Traore opened an account with Valbury Capital and deposited €20,000. He then proceeded to trade highly leveraged equity futures, thinking he was using demo software, but suddenly realized the platform was live, and he had racked up losses exceeding 120 times his deposit, and was bankrupt! He closed out the losing position, steadied his nerve and then built a long position exceeding $5 billion, finally closing out with a net profit of approximately $11 million! Valbury Capital have refused to pay out his $11 million and Mr. Traore is taking legal action to try to get it.
The story raises several questions for the U.K. FCA regulator on the facts of this story which can’t be swept aside:
How was Mr. Traore allowed to build and crystallize a loss 120 times in excess of his deposit?
How was Mr. Traore allowed to continue using the trading platform after he had already incurred massive real losses, without receiving an earlier automatic margin call?
How was Mr. Traore allowed to open new positions exceeding $5 billion when he had a negative liability greater than $2 million as his account equity?
These are very serious questions, and there can be little doubt that Valbury’s risk controls and compliance failed spectacularly. Having said that, it is probably a little unfair to put Valbury in the same category as Livermore’s bucket shop, as Mr. Traore had already wiped out his account before opening new positions, so he knew he had nothing to trade with. You can’t blame Mr. Traore for trying to make it back, but It is an open question what would have happened if Mr. Traore had contacted Valbury after the initial losses and told them he had thought he was using the demo platform. Only Valbury know what they would have done in that situation. If they would have taken Mr. Traore’s entire deposit or held him liable for even more than that, then I say that Mr. Traore has every moral right to the final $11 million profit.
This is going to be a very interesting case and I’ll be following it closely. It seems that Valbury’s initial defense is going to rest upon the fact that Mr. Traore underplayed his trading experience on the application form. If he hadn’t, would the outcome have been any different? I doubt it.