3 ms·

This is the main thing I got out of this story when it first broke. The firm was able to buy over a billion dollars worth of stock but was undercapitalized aft

This is the main thing I got out of this story when it first broke. The firm was able to buy over a billion dollars worth of stock but was undercapitalized after incuring a loss ~5MM? Just doesn't make sense.

gwern 13y ago
It might make sense if you're a pure middleman. If all gains and losses are your customers' problems and you're just using their bank accounts, you only need money to cover your own overhead and maybe cover fees before you can charge your customers (imagine you charge your customers monthly but the stock exchange charges you daily, you'll need 30 days' of fees on hand to pay the exchange before you then get reimbursed at the end of the month). Along comes this trader buying on behalf of the company and not a customer, and now they're stuck with a $5m hole and that was all of payroll for the year etc.
ChuckMcM 13y ago
Its the difference between the purchase price and the settlement date. I've got no idea what really happened but can speculate that what happened was that an order to purchases 1.625M shares goes in, (that will cost $1B), the trades are recorded people who've sold get notified they sold @ $xx etc. Now the trader was hoping the price goes up by a few $, then sells again. Now if everything "works as planned" when the trades are settled at the end of the day the people who bought put their money in the people who sold get their money out and the left over is in the bank. But if you buy the shares in the morning and the price goes down, if you want to 'hold' and wait, you need $1B to cover the purchase of the stock, but if you want to 'cut your losses' you just sell the stock again for what ever you can get before the markets close. I'm guessing this was what happened, and at the end of the day the difference was $5.3M which the company had to come up with to balance their accounts. That left them with not enough money for day to day operations, poof they are dead.

gwern 13y ago

It might make sense if you're a pure middleman. If all gains and losses are your customers' problems and you're just using their bank accounts, you only need money to cover your own overhead and maybe cover fees before you can charge your customers (imagine you charge your customers monthly but the stock exchange charges you daily, you'll need 30 days' of fees on hand to pay the exchange before you then get reimbursed at the end of the month). Along comes this trader buying on behalf of the company and not a customer, and now they're stuck with a $5m hole and that was all of payroll for the year etc.

ChuckMcM 13y ago

Its the difference between the purchase price and the settlement date. I've got no idea what really happened but can speculate that what happened was that an order to purchases 1.625M shares goes in, (that will cost $1B), the trades are recorded people who've sold get notified they sold @ $xx etc. Now the trader was hoping the price goes up by a few $, then sells again. Now if everything "works as planned" when the trades are settled at the end of the day the people who bought put their money in the people who sold get their money out and the left over is in the bank. But if you buy the shares in the morning and the price goes down, if you want to 'hold' and wait, you need $1B to cover the purchase of the stock, but if you want to 'cut your losses' you just sell the stock again for what ever you can get before the markets close. I'm guessing this was what happened, and at the end of the day the difference was $5.3M which the company had to come up with to balance their accounts. That left them with not enough money for day to day operations, poof they are dead.