Original post:
From ZeroHedge:
Just as Blythe Masters' (yes, that one) team suffered huge trading losses in the middle of 2010 following the abysmal RBS Sempra purchase, showing that when traders of scale lose, they lose big, so today another big commodities trader, Barclays, is reported to have gotten crushed on copper and other base metals bets gone wrong. Dow Jones says that Barclays is set to reshuffle its base metals trading team following a series of significant financial losses made by the desk this year.The story continues with the 50-sigma bit on the cxl'd warrants. Someone or some software may have their math wrong, 50-sigma moves don't happen. From our April post "When Goldman Sachs was Really, Really Unlucky (GS)":
"The base metals trading team is run by Iain MacRae, who is currently still working at Barcap. The company has been unravelling a number of its copper positions recently, traders and brokers said, along with positions in other base metals it trades. The majority of the losses were in forward copper spreads, people familiar with the matter said. Although these positions were in-the-money a year ago, the market has since gone in the other direction, forcing Barclays to close the positions out at significant loss, these people added....The investment banking division of Barclays Bank, Barclays Capital has been a category one ring dealing member of the London Metal Exchange since May 1997 and is traditionally a high volume participant in base metals futures and options trading.
It also owns a 2.3% stake in the LME." As to who the most likely beneficiary of this collapse is Goldman, which in tried and true fashion told its clients to be buying copper throughout the carnage, only to close its copper position at a 20% loss a few days ago. But not before indicating that even more bloodbathing is in store for the future, having concurrently reopened future bullish positions in copper....MORE
...Today MIT's Physics arXive has
which includes:How Unlucky is 25-Sigma?
Ha!The introduction is still wonderful and proves that academics can, at times, be funny:
One of the more memorable moments of last summer’s credit crunch came when the CFO of Goldman Sachs, David Viniar, announced in August that Goldman’s flagship GEO hedge fund had lost 27% of its value since the start of the year. As Mr. Viniar explained, “We were seeing things that were 25-standard deviation moves, several days in a row.” One commentator wryly noted:That Viniar. What a comic. According to Goldman’s mathematical models, August, Year of Our Lord 2007, was a very special month. Things were happening that were only supposed to happen once in every 100,000 years. Either that … or Goldman’s models were wrong (Bonner, 2007b).
Dowd and Woods: Centre for Risk and Insurance Studies, Nottingham University Business School, Jubilee Campus, Nottingham NG8 1BB, UK. Cotter: Centre for Financial Markets, School of Business, University College Dublin, Carysfort Avenue, Blackrock, Co. Dublin, Ireland. Humphrey: School of Accounting and Finance, University of Manchester, Crawford House, Oxford Road, Manchester M13 9PL, UK. Corresponding author: Kevin.Dowd@nottingham.ac.uk.
But as we saw in 2009's "David Viniar, CFO of Goldman Sachs Blows Smoke at Journalists on AIG" even that once in 100000 year estimate is far too low:
Several folks, when they finally quit laughing, pointed out how blatently Mr. V was spinning.
Most however underestimated how infrequent 25SD events are, the most common guess being once in 100,000 years. Tee hee.
In a snappy little eight page paper "How Unlucky is 25 Sigma" we see that at 7 Sigma the odds are:
UPDATE:
Barclays Capital to Wall Street Journal on Copper Losses: "Nonsense"
Several folks, when they finally quit laughing, pointed out how blatently Mr. V was spinning.
Most however underestimated how infrequent 25SD events are, the most common guess being once in 100,000 years. Tee hee.
In a snappy little eight page paper "How Unlucky is 25 Sigma" we see that at 7 Sigma the odds are:
...The reader will note that as k gets bigger the probabilities of a k-sigma event fallThe authors go on to describe the problems involved in computing numbers on the cosmological scales required for 25 standard deviations. A good read, both for the statistically challenged and for pros like Viniar, a very highly paid PR guy, in addition to his CFO duties.:
extremely rapidly:
• a 3-sigma event is to be expected about every 741 days or about 1 trading day
in every three years;
• a 4-sigma event is to be expected about every 31,560 days or about 1 trading
day in 126 years (!);
• a 5-sigma event is to be expected every 3,483,046 days or about 1 day every
13,932 years(!!)
• a 6-sigma event is to be expected every 1,009,976,678 days or about 1 day
every 4,039,906 years;
• a 7-sigma event is to be expected every 7.76e+11 days – the number of zero
digits is so large that Excel now reports the number of days using scientific
notation, and this number is to be interpreted as 7.76 days with decimal point
pushed back 11 places. This frequency corresponds to 1 day in 3,105,395,365
years....
UPDATE:
Barclays Capital to Wall Street Journal on Copper Losses: "Nonsense"
