Google-translated from Russian with minor reductions and corrections. New private trader from Kazan on the last trading day last year, managed to carry out transactions totaling 42 billion rubles ($0.5B), having only 5.5 million rubles ($70K) in his account. He was completely ruined. How could this happen? On the last trading day of 2015 (December 30) trading volume amounted to 296 billion rubles,. A significant proportion of that turnover provided private trader - copy center manager from Kazan Denis Gromov. Starting the day with 5.6 million rubles in the trading account, he managed over 4.5 hours to carry out more than 5000 transactions buying and selling foreign currency totaling 42 billion rubles. However, the final result was disappointing. As a result of trading Gromov has lost 15.1 million rubles, and he still owes the bank 9.5 million rubles. Gromov still do not really understand what happened. His main question to the broker: how it happened that the broker gave him the opportunity to open positions in the foreign exchange market with 1:1000 leverage. A novice trader For three months last summer - from June to September - the dollar rose from 50 to 65 rubles. Gromov said that he wanted to change 6M RUR he inherited in the bank, but it was expensive because of the big bid/ask spreads. Then he found out that you can trade currencies at exchange and opened a brokerage account. From September to December, the trader says he traded USDRUB_TOM, considered as the main insturment a RUR/USD currency pair. Russian Central Bank uses USDRUR_TOM to set the official exchange rate of the US currency. The exchange also traded USDRUB_TOD which settles on the same day (TOD - today). "I had plus 1.5 million, or minus, starting from 6 million rubles .Having 5.6 million rubles left by end of 2015, but I could easily return loss, "- said Gromov. New Year On the New Year day Gromov saw that the dollar began to rise on the stock exchange, and decided to open a trading terminal. He noted that the dollar with next day settlement (USDRUB_TOM) is 20 cents more expensive than the dollar with today (USDRUB_TOD) settlement. Gromov : “I saw an excellent opportunity to buy low and then sell high, and make money on it. "Given the brokerage commission, I thought that I earn 13 cents on the dollar," - he wrote in his claim for "Alfa-Bank". As the broker reports, from 10:27 to 11:05 - that is, for the 38 minutes he had about 2650 transactions - buying dollars with "today" settlements and selling with "tomorrow" settlements. Available collateral of 5.6 M RUR was enough to buy dollars to approximately 50 million rubles and sell the same . Total position on the two instruments did not go beyond these limits, but the turnover were astronomical. The total turnover at that time amounted to 23.7 billion rubles. Gromov bought dollars USDRUB_TOD for a total of 11.8 billion rubles, and sold the same amount of USDRUB_TOM. "The balance of my account was growing up, I was rich, and happy about it," - said Gromov. And at that moment the bell rang –risk manager from "Alfa-Bank" called and explained that loan amount to carry TOM position will amount to tens of millions of rubles. The manager offered to reduce the amount of borrowed funds and "to sell in reverse" That is, it was necessary to gradually buy foreign currency "tomorrow" and sell - with "today" settlements. Almost 20 minutes Gromov took to realize what had happened. Over the next 3.5 hours he did another 2600 transactions worth 18.4 billion rubles. At 15:00 as a result of these transactions Gromov turned a loss of 9.5 million rubles. "My wife hysterical, family on the verge of divorce, the prospects are very sad," - writes Gromov in his claims against Alfa Bank. No limits The main reason for what happened - is the "Alfa-Bank" sets a limit on the operation of these two instruments. Brokers can do it in different ways. “Our requirements are tied to the size of the position in US dollars, and not to the size of individual positions in these instruments." - said the press service of" Alfa-Bank "in response to a request to RBC. "Alfa-Bank" stated that the rules of risk management had not been violated. "Broker acts according to the rules of law, stock exchange rules and common market practice in the field of risk management", - reported the press service of the bank. Trader Mistakes Gromov did not realize that to play the difference in prices between the two instruments in the dollar may be economically impractical. «USDRUB_TOM is always more expensive then USDRUB_TOD. This is because the first settles one day later than the second. The difference is the cost of borrowed funds for one business day, "- says portfolio manager of" Finam "Alexander Dorofeev. In the case of Gromov transactions with USDRUB_TOM were to occur on the first business day of the year - on 11 January. Thus, he was borrowing a lot of money for 12 days. "The customer does not take into account the cost of arbitrage trading, did not appreciate that the transfer of the margin position is associated with a cost of its funding," - said the press service of Alfa Bank. According to a broker report Gromov was not able to completely unwind his position and had to borrow 2.7 billion rubles. The fee for a loan was 8.9 million rubles. Another 5.6 million was broker commission for transactions worth billions of rubles. The rest of the loss of 15 million rubles was from 5000 transactions. "Trader did not consider the cost of borrowed funds and the costs of overnight position" - confirms Dorofeev. The losses could be higher, according to Alfa Bank: Broker employee telephoned a client, in order to prevent even greater losses twice reduced the fees for brokerage services, as well as the cost of the overnight position, using lowest-possible rate - 10.05% per annum. "Broker has done everything possible to minimize the loss of customer," - said in the bank's press service. romov is looking for lawyers and thinks that he will have to, one way or another, to meet with Alfa-Bank in court. He said that he had no money. "I come to the conclusion that such a situation is impossible. With 5.6 million rubles account broker allowed me to buy $ 162.8 million, lose all the money and get into debt for 9.5 million rubles. “
Thanks, interesting story. Trading is a fantastic game, but with rules you must master before playing. In this case, there ain't NO such thing as a free lunch. CM
Sad story. That's why I always try out a new trade with, say, 20M Rubles instead of going all in with 20B Rubles the first time
The problem is he was trying to buy USD/RUB future contracts for tomorrow delivery and sell them today (which are always more expensive than tomorrow) thinking he is exploiting price inefficiency. But he forgot about borrowing costs (which are quite high because of difference in interest rates of US and Russia). So next day he owned billions of rubles to his broker. Sad story. That's why I prefer to trade spot on USD/RUB and use offshore brokers (currently Hotforex) for that purpose.
one heck of a story, and its a life lesson that he will have to carry for a very long long time. good read thanks for sharing
This example shows even well-regulated local brokers can get you into trap easily. They had no restrictions on potentially unwelcome trades, trader might be unaware of. And its sad. That's I prefer CFD's with margin like I now had in Hotforex where I'll be unable to get into negative side and own money to the broker.