Looks like that "Starter Trader" guy who was posting here a few days ago found a job. You remember him. "Me broke student. Want to get rich. Teach me to trade (that is... gamble away the last money I have). Willing to work hard."
What happens is this. These guys realize they know nothing, but if they flip the coin on a big trade with opm then they have a 50/50 chance of striking it rich. The other 50 is not thought about until they get it wrong.
So the Chinese invented derivs. eh? Now this fellow is short, huge? He thinks the price will fall? What if the Chinese export a bunch of copper? Which is what the european wires are carrying right now. This guy goes from being shot in back of head to retiring on the coast. Geo.
I think all laid off blue collar workers should stage a patriotic rally in copper just to stiff the Chinese. I think the Shanghai sales are just a bluffing tactic. On a serious note, one issue if they don't deliver the copper is who was the broker? Seems there is a view that they might say the trades were not authorised by the Chinese govt in which case the broker will have to make good to the exchange.
By Martin Hayes LONDON, Nov 16 (Reuters) - The big loss-making short position that a Chinese trader is said to have built up in copper futures will not cause the London Metal Exchange (LME) to melt down, although its brokers could end up out of pocket. Trades on the LME are centrally-cleared and guaranteed by a clearing house. But LME brokers would have to cover losses if their customer walks away from the debt, although they would then initiate legal action. "That is the real issue -- and it is not as if it has not happened before," a senior trader said, referring to principals walking out on contracts. "We've seen this before in tin and copper." Liu Qibing, a senior trader working for an entity of China's State Reserves Bureau (SRB), is rumoured to have taken a short position of between 150,000 and 200,000 tonnes as a bet that copper prices would fall. Instead it hit new peaks. Sources said Beijing-based Liu might have built the positions through eight brokers in London at prices of below $3,500 a tonne. If China took its short position last spring, as traders believe, it could translate into losses of $200 million. Prices are now at $4,100 a tonne, having hit a record $4,174 on Tuesday. The SRB said Liu was on leave and any short position was undertaken on his behalf and not by the SRB, adding to uncertainty over whether the bureau will recognise obligations. "Are they (China) going to default? The brokers will have to cover the position, and then go legal," another trader said. "If the paperwork stands up -- and I'm sure it does -- then they (China) don't have a leg to stand on," he added. MARKET POSITIONS COVERED On the LME, LCH.Clearnet is the central counterparty to clearing members, but has no legal relationship or direct exposure to non-clearing members or to other clients of members. "Clearing members must meet all their proprietary and client-linked responsibilities to LCH.Clearnet. LCH.Clearnet would take no action unless client failure forces a member or members to fail to perform to LCH.Clearnet," a spokesman said. Traders said most of the brokers, subsidiaries of large parents, would have funds to meet losses when the positions mature in December if they are not rolled forward or delivered. "But if that happens, it makes it more difficult for the Chinese to do business in the West -- no one reputable would want them as a customer or give credit," a third trader said. "Ultimately, they should bite the bullet and learn their lesson," he said. ITC AND CITIC Whatever happens, the LME is in a much stronger position then a generation ago, when the tin crisis threatened its very existence. In October 1984, the ITC, which was a United Nations multi-governmental agency, defaulted on its long LME tin position, lacking the funds to maintain prices at artificially high levels. The LME, which was a market of principals, not using clearing, was forced to suspend the contract. Brokers had to settle contracts at an arranged price -- called a "ring-out" -- and it took four years of legal action before the ITC agreed a settlement paying back just 30 percent of losses. The LME re-organised radically, shaking up its governance structure, but also introducing clearing, which removed the domino effect of one broker's losses pulling others down. Chinese traders have also come a cropper before in copper, and then tried to wriggle out of losses. In mid-1994 it emerged that a Shanghai unit of CITIC (China International Trust and Investment Corp) had run up debts of $40 million to some 14 brokers on unauthorised trade in LME copper. The losses had accumulated as the traders had taken advantage of special credit lines offered by LME brokers. Four members of CITIC's Shanghai staff were later arrested while talks on the debt dragged on between CITIC and brokers. CITIC managed to survive the losses, eventually settling with brokers in March 1995. The key figure in CITIC's trading was Chen Tongsheng, in his early 30s, who worked at the CITIC Shanghai office. He was subsequently jailed. (Additional reporting by Polly Yam in Hong Kong and Lucy Hornby in Shanghai)