This is reposted from the CVI thread....__________I am sure you...

This is reposted from the CVI thread....

__________

I am sure you have all heard the story of poor Jerome the trader as Soc Gen in Paris who caused his employer to make a loss of about $4.9bn on options trading (as widely reported on Thursday).

In their market ANN on Thursday the CEO of Soc Gen said that they discovered the unauthorised positions last Friday, discussed it over the weekend and liquidated all the positons first thing on Monday morning.

On hearing this news I made a few calls to various traders / market makers and others that I know here in Europe to see what else I could find out.

The Soc Gen trader Jerome Kerweil (hope I spelled that correctly) was a vanilla options trader for Soc Gen. These Vanilla Options are of course just one step removed from the underlying securities themselves. JK traded these across Europe. So When the Soc Gen management closed out of all these positons first thing on Monday morning it had an immediate negative effect on the all the main European markets.
General consensus is that the options in question represented anywhere upto US$40bn in underlying stock (now confirmed). Consequently liquidation of these vanilla options by Soc Gen would have caused counterparties all over Europe to sell the underlying stock as a cause and effect of bailing out of the options all at once. You will recall that on Monday Europe opened down big time and then just kept falling on no apparent news.

So my point here is that the big sell off this week was triggered by one trader with huge unauthorised vanilla options positions and not by usual market fundamentals. It was Soc Gen's selling that kick started the whole sorry episode.

Now as CVI was heavily hit during this sell down and has not yet recovered one would have to assume that CVI is grossly oversold - given that the wider market sell down which caused the CVI decline was caused by one bank in Europe unwinding huge unauthorised positions in European vanilla options.

The Fed did not know about the Soc Gen story when they cut rates by 75bp on Tuesday. Which could lead one to believe that the Fed cut rates by a panic amount when not in poosession of the facts.

Anyway we now know what happened on Monday and moving forward we have much lower interest rates in the USA as a result.... which can only be good news.

As the only news from CVI this week has been most positive then I find it a bit strange that CVI has not recovered along with the rest of the market.

Sorry Mods, if this should be in another thread.

EB