The Worst Forex Trader Ever?

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Takeaway: Being a bad trader is one thing. Being a bad trader with your employer's money is another thing entirely.

The Worst Forex Trader Ever?
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There are a lot of articles exploring the best currency traders in the world. We even have one about the greatest trade ever made. However, in this article, we will look at the other side of the story and learn about a forex trader who made a decent case for being called the worst all-time.

Allfirst Bank Buffs Up Its Trading Desk

The year is 1993. Tag Team was burning up the charts with "Whoomp! (There It Is)", and Allfirst Bank, part of Allied Irish Bank (AIB), hired a new trader to expand the currency operations at the bank. Like many banks, Allfirst dabbled in directional trading, but their new currency trader, John Rusnak, sold them on a vision of profiting from slight pricing differentials between currency options and currency forwards - an arbitrage strategy.

In theory, Rusnak would purchase forward contracts on a currency and then hedge the position with put and call options. Because of the price difference between the contracts, a profit could be realized with very little risk. It sounded good, so the bank execs installed Rusnak at a trading desk and charged a manager unfamiliar with currency markets with monitoring his trading. This was the start of a series of missteps that would eventually make Allfirst a case study in weak financial controls.

Arbitrage Goes Out the Window

Rusnak was hired based on his arbitrage strategy, but he rarely practiced it. Whether this is because the opportunity is much smaller than he thought or it was just simply too much work is an open question. Regardless, Rusnak quickly fell back on directional trading. Even worse, Rusnak proved to be a poor trader when it came to predicting future currency values. This wouldn’t have been a huge issue but for the fact that Rusnak was making big bets with the banks money and then neglecting to hedge any of those positions.

From Bad Trader to Bank Fraudster

Rusnak’s losses continued to mount over the years. Around 1996-97, he found a way around the pesky problem of reporting his unhedged bets on the Japanese yen. Remembering his original options strategy, Rusnak found that he could simultaneously buy and sell an option in the computer system. This allowed him to "trade" options without using any more capital. More importantly, by extending the expiry of the imaginary option he needed to cover a losing position, it appeared that his trades were properly hedged.

Not only was Rusnak not found out, but he was able to convince his employers to set up a prime brokerage account for his use. The prime brokerage account - an account usually reserved for hedge fund managers and elite (read: filthy rich) traders - allowed Rusnak to take his trading to a whole new level. His bets grew bigger and so did his losses.

A Capital Drain

Even though the losses appeared to be hedged, the prime brokerage account highlighted just how much capital the bank had tied up in currency trading. In the early 2001 (yes, that’s correct - this went on for years), Rusnak was selling real options offset by imaginary options in a bid to raise capital off the books in order to increase the already enormous amount of capital he had available for trading. He even found a way to fudge the total capital numbers for his trading so that the bank’s value at risk on the books bore very little resemblance to the actual trading going on at his desk.

By December 2001, Rusnak’s supervisor began to worry about the volatile effect the currency desk was having on the bank’s overall balance sheet. Even with Rusnak’s smoke and mirrors, the capital tied into trading currency futures was showing fluctuations in the tens of millions. In January, the supervisor requested that all trades be closed and that Rusnak confirm them. Rather than confirming them, Rusnak quit showing up to work in early February 2002.

The Fallout

Allfirst quickly discovered that they were out over $690 million, including trading losses and the imaginary assets that turned out to be bogus. Rusnak was arrested and sentenced to seven and a half years in prison for fraud. Instead of getting the trading genius they sought, Allfirst hired a genius at evading internal controls. The scandal resulted in Allfirst being sold off and AIB putting a lot more thought into financial controls.

Perhaps Rusnak wouldn't have got in so deep if the amounts of accessible capital were smaller or his risk management techniques were actually acted upon, but that doesn't change the fact that the majority of his directional bets were wrong. At $691.2 million in losses, John Rusnak makes a strong case for being considered the worst currency trader ever.


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About Andrew Beattie
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Andrew Beattie has spent most of his career writing, editing and managing financial content as well as more general web site material in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. He has been a long-time contributor to Investopedia.com and is currently venturing forth on ForexDictionary.
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