Given that I don't understand or have studied finance, I shall try to understand what happened during this incident.
Recently, a UBS trader lost USD$2 billion while trading. Of course, there's a lot of outrage (heard that, seen that before..) about how such a sound financial institution could have such a lax financial control, but I think the whole system was designed from the start to incentivise such risk-taking behaviour.
"In simple terms Delta One Trading is buying or selling an investment instrument that you don’t own. Delta One desks trade financial derivatives, or investment vehicles that mirror closely the price of a real asset. Any position taken is offset or hedged."
You are trading virtual goods.
The trader was earning at least a comfortable mid-6 figures. Let's assume he earned around USD$300,000/year and his annual performance bonus is 24 months. His bonus would have amounted to USD$600,000. Of course, his bonus is based on performance. It is also apparent that his bonus dwarfs his salary by a lot. Therefore, he would definitely want to earn more by taking extreme risks than earning just his basic salary. Given that traders are regularly fired based on performance, he would be forced to chase profits. Most investment bankers are also only in it to make a quick buck and retire in 5 years, hence everyone is trying to earn as much as possible before burning out.
For him to lose USD$2 billion, he must also have had the chance of earning USD$2 billion. For a person earning ~USD$1 million/year, he enjoyed 1000x leverage. In order to employ that leverage successfully, he should have some combination of insider knowledge, intelligence, sense of timing, judgement and experience. Guess he did not.
I know things don't scale as simply, but would you let someone earning $1 buy something from you that costs $1000 on credit?
The other thing that puzzles me is the unknown identities of the parties who earned that USD$2 billion. Someone must have earned it. If someone did not earn it, then we are effectively creating more exotic virtual financial fluff and printing more useless paper money.
Back to a simpler and more rational life as an engineer in a startup.
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