Investment Banks, one of the major players in stock markets, currency markets and virtually every asset-class, have recently been the centre of a rumpus over pay-structure that rewards excessive risk taking. Indeed as a trader at a capital rich institution you have the opportunity to make millions of dollars and get your cut. You also have the opportunity to lose millions of dollars…and come away not a penny poorer. Perhaps it is this system, often equated to a free call option on bank profits for traders, which has created our current environment.
In recent times, Jerome Kievel lost billions trading European markets. He however worked on a Delta1 desk, meaning he should have been fully hedging all the swaps he sold or bought with the underlying index constituents - he should have had very little at risk at any time.
Forex markets too have fallen victim to rogue traders, two of the most notable being, Luke Duffy in 2004 and John Rusnak in 2002, both losing millions of dollars and serving prison sentences. Things reached new extremes in China just a week ago, when a securities trader was executed for his illegal transaction in the markets, and his refusal to reveal where the lost money had been siphoned.
Excessive risk taking culture has been blamed for the credit crisis by critics. Even central banks however seem to have fallen foul recently, loaning to riskier creditors for higher returns. Greece is said to have been damaged significantly by bad debts with Eastern European states such as Latvia.
The market is well aware the there may be more bad debts, and more troubled banks, including Central Banks, out there, and the caginess towards the EURO in recent months reflects this.
The EUR in this session is trading as follows against its three major partners: EUR/USD 1.4403/4 (+0.46%), EUR/GBP 0.8845/8 (+0.10%) , EUR/JPY 128.82/7 (-0.09%), trading softly on low volumes ahead of the weekend and the Christmas holidays.