Film analysis: Rogue Trader

Film analysis: Rogue Trader

Marie Poff

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Rogue trader film and explains the related financial concepts.

Based on a true story, ‘Rogue Trader’ details how risky trades made by Nick Leeson, an employee of investment banking firm Barings Bank, lead to its insolvency. This film explores how financial oversight and a lack of risk management from Leeson’s supervisors, lead to irrecoverable losses and the eventual fall of the banking giant.

Film summary

‘Rogue Trader’ recounts the exploits of Nick Leeson and his role in the downfall of Barings Bank, one of the single largest financial disasters of the nineties. Directed by James Dearden, this film encapsulates the economic and social changes of a tumultuous period. Leeson is a young derivatives trader sent to work in Singapore for Barings Bank, a major investment bank at the time. After opening a Future and Options office in Singapore, Leeson is placed in a position of authority where he takes advantage of the thriving Asian market by arbitraging between the Singapore International Monetary Exchange (SIMEX) and the Nikkei in Japan. He begins making unauthorised trades, which initially do make large profits for Barings – however he soon begins using the bank’s money to make bets on the market to recoup his own trading losses. At first, he tries to hide his losses in accounts, but eventually loses over $1 billion of Barings capital as its head of operations on the Singapore Exchange. He eventually flees the country with his wife, but inevitably, he must face how his actions lead to the bankruptcy of Barings Bank.

The Rogue Trader film

Financial concepts from the Rogue Trader film

Financial derivatives

For any new investors, financial derivatives describe a broad class of trading instruments that have no tangible worth of their own, but “derive” their value from a claim to some other financial asset or security. A few examples include futures contracts, forward contracts, put and call options, warrants, and swaps. Derivative trading started from the practice of fixing contracts ahead of time, as a way for market players to insure against fluctuations in the price of agricultural goods. Eventually the practice was extended to cover currencies and other commodities. As exchange rates became increasingly unstable, the derivatives trade facilitated huge profits for those estimating the future relative value of various commodities and currencies, through the buying and selling complex products.

Barings Bank

Founded in 1762, Barings Bank was the second oldest merchant bank in the world before its collapse in 1995. Barings grew from being a conservative merchant bank to becoming heavily reliant on speculation in the global stock markets to accumulate its profits. The derivatives market was somewhere this could be done in a very short space of time. Following the stock market crash of 1987, derivatives became central to the banks’ operations as they sought to offset their declining profits. The volume of their derivative trading soared from less than $2 trillion in 1987, to $12 trillion in 1993. As finance capital became increasingly globalised, Barings branched out to exploit these new markets in Latin America and the Far East.

Tiger Economies

The term “tiger economies” is used to describe the booming Southeast Asian economies of South Korea, Taiwan, Hong Kong, and Singapore. Following export-led growth and especially the development of sophisticated financial and trading hubs, Western interest spiked for these untapped markets in the 1990s.

Arbitrage

Profitable arbitrage opportunities are the result of simultaneously buying and selling in different markets, or by using derivatives, to take advantage of differing prices for the same asset. In the film, Leeson makes a profit by exploiting the small price fluctuations between SIMEX in Singapore and the Nikkei 225 in Japan.

Cash neutral business

A cash neutral business means managing an investment portfolio without adding any capital. For Leeson, any money made or lost on the trades should have belonged to the clients, and only a small proportion of the trades were meant to be proprietary. However, Leeson used Baring Bank’s money to make bets on the market to recoup his trading losses.

Short straddle position

A short straddle is an options strategy which takes advantage of a lack of volatility in an asset’s price, by selling both a call and a put option with the same strike price and expiration date, to create a narrow trading range for the underlying stock. Lesson used this strategy but sold disproportionate amounts of short straddles for each long futures position he took, because he needed to pay the new trades, the initial margin deposits, and meet the mounting margin calls on his existing positions.

Errors account

An errors account is a temporary account used to store and compensate for transactions related to errors in trading activity, such as routing numbers to an incorrect or wrong account. This practice allows for the separation of a transaction so that a claim can be made and resolved quickly. Leeson used this accounting to conceal the losses to Barings Bank which eventually amounted to over £800 million, though the account was supposedly activated to cover-up the loss made by an inexperienced trader working under Leeson’s supervision.

Key insights for investors

Don’t Lose Sight of Reality

An important insight is noticing how Leeson forgot to consider the real-world impact of his trades. He reflects on seeing trading as just artificial numbers flashing across screens, “it was all paid by telegraphic transfer, and since we lived off expense accounts, the numbers in our bank balances just rolled up. The real, real money was the $100 I bet Danny each day about where the market would close, or the cash we spent buying chocolate Kinder eggs to muck around with the plastic toys we found inside them.” Leeson saw the Kobe earthquake as nothing more than an opportunity and conducted more trading in one day than he ever had before as the market was butchered. Investors can avoid Leeson’s mistake by keeping a firm grasp on reality, and remembering the real companies and people represented by the stock exchange.

Destructive Practices

Other employees at Barings Bank most likely relied on internal auditors to discern wrongdoings or mistakes made by others, but as can be seen from Leeson’s case, regulators can be slow to catch on to any wrongdoing – especially when there are large profits involved. The lesson here is that an investor must be aware and proactive in helping to prevent other investors from engaging in destructive trading practices. This is especially true when it comes to newer markets or products, where regulators are unsure what entails best practice.

Tacit Agreement

While Leeson is assumed to be the villain, consider how Barings was able to contravene laws forbidding the transfer of more than 25 percent of the bank’s share capital out of the country for nearly every quarter during 1993 and 1994? Ignorance is not an excuse – tacit agreement is as effective as active engagement. A lesson here is that investors should remain informed on all their business engagements regardless of how much profit it being made.

Relevance to the SimTrade certificate

Through the SimTrade course, as well as a strong understanding about trading platforms and orders, you are taught about information in financial markets and how to use this to make successful trades. Several case studies teach you how to analyse market information to make valuations, and correctly assess how market activities will affect your own trades. The simulation and contest allow you to compete against others in the course and deepen your understanding of how a market reacts to different players.

Famous quote from the Rogue trader film

Nick Lesson: “Despite rumours of secret bank accounts and hidden millions, I did not profit personally from my unlawful trading. To be absolutely honest, sometimes I wish I had.”

Trailer of the Rogue trader film

Related posts on the SimTrade blog

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▶ Akshit GUPTA Analysis of The Rogue Trader movie (another analysis)

▶ Akshit GUPTA The bankruptcy of the Barings Bank (1996)

▶ Jayati WALIA Value at Risk

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

The bankruptcy of the Barings Bank (1996)

The bankruptcy of the Barings Bank (1996)

Akshit GUPTA

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2022) analyzes the Big Short movie.

Founded in 1762 by a British born man named Francis Baring, Barings Bank was the second oldest merchant banks in the entire world with some of the most popular names on their client list. Baring futures was incorporated in Singapore in the year 1986 to trade in the futures market at SIMEX (Singapore International Monetary Exchange) under the parent company, Barings group. The arm trading in futures generated reasonable profits until 1992 when Nicolas William Leeson joined as the head derivative trader at the trading floor of the bank at SIMEX.

The bankruptcy

Barings Bank

Nick Leeson, as the new in-charge of derivatives trading at Baring Futures, was assigned to generate profits by arbitraging the price difference of Nikkei 225 future contracts between SIMEX and Japan Stock Exchange. He was also made to look after both the trading floor and the back office to enter and settle trades. A persistent worker, Nick started generating good returns by entering unauthorized trades on behalf of the bank. His trades were working well until a floor trader undertook a wrong trade and resulted in small losses to the bank. To cover the losses for the trader, Nick opens a new account numbered 88888 to hide those losses. But as the losses kept on accumulating, Nick started pursuing his unauthorized trading from the shell account to make up for the losses by doubling his bet. He also started holding on to his position for longer periods than he was permitted in order to generate higher profits. However, the audit system at the bank failed to investigate the accounts due to its inefficiency.

Nick was able to cover up for these losses until a major earthquake struck Japan in 1995 and his unhedged positions started pouring in millions of pounds of losses in the shell account. In order to cover for it, Nick started taking even bigger positions in the futures in the attempt of moving the markets in his favor.

However, the markets didn’t spring back to his side and Nick accumulated losses of more than 800 million pounds. Knowing his game was coming to an end, Nicholas Leeson fled to Germany in order to avoid judicial actions,  but was caught at Frankfurt airport in March 1995 and sentenced to 6 years of jail in Singapore.

Nick Leeson

Lacking sufficient funds to cover for the settlement of the futures contracts, Barings Bank was liquidated on 26 February 1995. In March 1995, the Dutch banking group, ING, purchased Barings bank at a very nominal price resulting in the formation of ING Barings.

In order to prevent such debacles in the future, amendments were made in the Futures Trading Act on 1st April 1995, giving the monetary authority of Singapore the right to oversee the activities at SIMEX more closely. The fall of Baring Bank is a traditional example of how a lack of proper compliance and checks can lead to catastrophic events that even the biggest of all can’t survive.

Relevance to the SimTrade course

The fall of the Barings Bank teaches us some important lessons that every trader and company should follow in order to prevent such events from happening again in the future. Nick Leeson used a martingale strategy in order to double his bets on the loss generating trades. The confidence of covering up for the losses clouded Nick’s judgment and resulted in even bigger losses for the bank. A good trader should never let fear or greed dictate his of her actions. The unhedged trades Nick entered produced catastrophic results when the entire market collapsed due to a natural calamity. The results of such actions were well seen by the increase in losses in the 88888 account.  The excessive use of leverage, speculation, and unplanned trades led to the collapse of this mighty institution. The SimTrade courses teach us to execute trades in a well-planned form in order to handle any unfavorable circumstances. The use of different types of orders is very essential to cover open positions and protect against such events. The fall could have been controlled if stop-loss strategies would have been adopted by the trader. The incidence teaches us the very essence of not trying to fight the financial markets as they are always right.

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Financial concepts

▶ Akshit GUPTA Regulations in financial markets

▶ Akshit GUPTA Market manipulation

▶ Akshit GUPTA Securities and Exchange Commission

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2022)

Analyse du film « Margin Call »

Analyse du film « Margin Call »

Mohamed Dhia KHAIROUNI

Cet article écrit par Mohamed Dhia KHAIROUNI KHAIROUNI (ESSEC Business School, Grande Ecole -Master in Management, 2019 – 2022) analyse le film Margin Call et explique les concepts financiers sous-jacents.

Un film captivant et donnant à réfléchir que je vous invite à regarder !

Le film Margin Call de J. C. Chandor retrace la crise économique et financière de 2008. Avec un casting incroyable et prestigieux, ce film aborde les problèmes de la finance avec une grande subtilité. J. C. Chandor tente de faire comprendre à l’audience ce qui s’est réellement passé la veille de la crise des subprimes.

Résumé du film Margin Call

Le film se passe en 2008 et retrace la crise économique financière qu’a connu le monde à travers l’exemple d’une banque d’affaires à Wall Street. Les actions se déroulent en 24 heures et nous font suivre les différentes étapes de la catastrophe : de la naissance du soupçon à la totale prise de conscience de l’étendue du cataclysme, de l’examen des dégâts, à la fois personnels et financiers, au retentissement du gong final, lorsque le “bain de sang” des négociations s’achève. À chaque échelon de la hiérarchie, de l’analyste junior aux dirigeants historiques, chacun doit tenter de gérer la situation et assumer sa part de responsabilité dans ce cauchemar devenu réalité. Ce film montre également le caractère humain de la finance : les hommes et les femmes qui ont engendré la crise n’étaient rien d’autres que des gens ordinaires qui, malgré leurs compétences, leur intelligence et leurs salaires souvent mirobolants, ont été victimes de leur propre négligence, de raisonnements à court terme et de priorités discutables.

Liens avec le cours

Le film Margin Call a un lien étroit avec notre cours de gestion financière. Il dessine les investissements d’une banque d’affaires et le caractère dangereux et douteux des actifs qu’elle détient. Il s’agit de produits hypothécaires sources de la bulle financière qui a secoué le monde en 2008.

Comme vu dans le cours avec SimTrade, John Tuld décide de vendre les actifs toxiques dès l’ouverture de Wall Street, au matin. Les objectifs sont atteints, à savoir la vente de plus de 93% des actifs toxiques. On voit également sa volonté à être le « premier » à liquider ces titres. En effet, Tuld annonce qu’il y a trois manières de réussir « Être le plus intelligente, être le premier ou le tricher ». Admettant ne pas être parmi les plus intelligents et réfutant se classer dans la troisième catégorie, il opte pour le deuxième choix : être le premier.

Le film Margin Call montre aussi l’intérêt porté au court-terme sans réelle réflexion visionnaire. Cette boulimie financière a fini par engendrer une crise mondiale dont les répercussions se manifestent aujourd’hui. Or, dans « gestion », anticiper est primordial.

Lien avec les métiers de la finance

Eric Dale, directeur de la gestion des risques : officiant au sein d’un établissement bancaire ou financier, le gestionnaire des risques (risk manager en anglais) a pour mission d’évaluer et de maîtriser les risques encourus lors d’une opération financière pour laquelle son employeur s’est engagé.

Ses missions principales consistent à :

  • Augmenter le rendement financier sur le risque encouru
  • Déterminer les points de fragilité d’une entreprise
  • Évaluer, anticiper et analyser les risques encourus
  • Effectuer des contrôles
  • Définir les répercussions financières
  • Prévoir un équilibre entre rentabilité et sécurité

Peter Sullivan, analyste financier : il procède à l’évaluation des sociétés sous tous leurs aspects : rentabilité, ressources humaines, restructurations à opérer…

Il rencontre régulièrement les responsables de la communication financière, les directeurs financiers, directeurs généraux des sociétés du secteur qu’il étudie.

S’il travaille dans une banque, il peut exercer un rôle de conseil auprès des gestionnaires de portefeuilles sur l’opportunité d’effectuer tel ou tel placement. Dans les deux cas, il suit de très près les salles de marchés.

Passages marquants

Certaines phrases sont particulièrement marquantes dans le film :

« Les banquiers, soumis au seul besoin d’argent que leur train de vie a fini par exiger, gagnent toujours et refusent de perdre de l’agent quitte à en faire perdre à leurs clients. »

« Dans une société qui accepte toutes les passions, celle du financement à crédit permanent doit certainement se payer d’un prix, celui des crises financières. »

Ces phrases nous poussent à remettre en cause le système : même avec parfois de faibles intérêts négatifs, le système continue de fonctionner jusqu’aux crises, ces faillites d’entreprises ou de particuliers étranglés par les taux de crédits devenus exorbitants.

Bande-annonce du film

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A propos de l’auteur

Article écrit en mai 2020 par Mohamed Dhia KHAIROUNI (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).