Trader Wipeout Leaves Dutch Bank A $200 Million Tab

Trader Wipeout Leaves Dutch Bank A $200 Million Tab

almost 4 years ago2 mins

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Dutch bank ABN Amro said on Thursday it would take a $200 million hit – 10% of last year’s profit – after market swings left one trading client unable to cover its losses. That may bother investors worried about financial sickness spreading through Europe… 🤢

What does this mean?

ABN makes financial trades on behalf of its customers. As well as buying and selling stocks, bonds, and commodities, it handles “derivatives” with values based on the prices of other investments. These include “options” and “futures”, which allow traders to buy or sell things at a certain price on a certain date.

But the recent bout of market volatility (US stocks experienced their five biggest daily gains and falls ever this month) has left some speculators spectacularly wrong-footed. One big trader using “leverage” – borrowing several times the amount of cash it actually had – collapsed last week after being unable to cover the cost of its commitments, with another “margin trader” leaving ABN to pick up its tab. (Check out our Pack on Using Leverage for more on this risky business…)

The US S&P 500's progress has been choppy this year (Source: Markets Insider)
The US S&P 500's progress has been choppy this year (Source: Markets Insider)

One group of European traders this week called for a relaxation of rules on the size of losses banks allow derivative-dealing clients before closing accounts. Without their business, market liquidity may dry up – leaving the few remaining trades exaggerating price swings. But ABN’s experience hardly inspires confidence… 😑

Why should I care?

If “ABN Amro” sounds familiar, that’s because the 2007 takeover of much of its (non-Dutch) business by Royal Bank of Scotland marked, for many, the high-water mark of pre-financial crisis hubris.

Investors concerned about this knock to the present bank’s profit sent its stock down 4% on Thursday, even as European indexes rose. But some may also worry about the wider implications of March’s market madness for the closely intertwined European banking system. A financial crisis in, say, Italy could quickly spread to French, German, and UK banks – as well as certain already weakened Dutch ones… 😬

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