A:

Every trader wants to set a record, but the hope is that it will be a record profit rather than a loss. With losses topping out at $7.1 billion, Jerome Kerviel better than tripled the trading losses of rogue trader Nick Leeson – one of the best-known rogue traders before Kerviel came along.

A trader at Societe Generale, Kerviel created these losses by speculating in European futures. Kerviel made multiple short-term bets on the movement of the European market in order to profit when he guessed correctly. Kerviel was able to manipulate the system using knowledge he gained while working in the office that monitored traders. Kerviel increased his bets by fooling the company risk management system to allow him to exceed his credit limits.

The size of Kerviel's trades were said to exceed the market capitalization of the bank. When a person is that highly leveraged, the chances of something going disastrously wrong are high. The mortgage meltdown shook out worldwide markets and accelerated losses in Kerviel's portfolio. On January 18, 2008, SocGen launched an investigation into Kerviel's trading and, upon discovering how dangerously leveraged they were, unwound his positions for a $7.1 billion loss.

Kerviel made no personal profit from his rogue trading. There is even some doubt as to whether or not he was truly a rogue trader because of the sheer size of the trades he was making. Some, including Kerviel himself, allege that SocGen higher ups knew what he was up to, if not how much he was betting, and supported it as long as it was profitable. Either way, it represented a serious oversight at SocGen and affected the bank's share price as angry shareholders sold.

Read about other rogue traders in our article Trading's 6 Biggest Losers.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. How did derivatives trader Nick Leeson contribute to the fall of Barings Bank?

    When an earthquake shook Kobe, Japan in 1995, it also broke open an ongoing scandal within the walls of Barings Bank. At ... Read Answer >>
  2. How did Peter Young gain infamy as a "rogue trader"?

    Peter Young's notoriety as one of the most memorable rogue traders is not a result of the amount of money he stole, but the ... Read Answer >>
  3. Is it better practice to use a stop order or a limit order?

    Discover whether it is considered best practice to use stop losses or limit orders. Both options have their advantages and ... Read Answer >>
  4. How do you lose money in the Forex market?

    All trades made in the forex market are made in pairs. In other words, one currency is always quoted against another currency, ... Read Answer >>
  5. What are some ways to reduce downside risk when holding a long position?

    Learn about the various methods a trader can use to minimize risk of loss or protect a portion of profits in an existing ... Read Answer >>
  6. How do traders use out-of-the-money options to hedge?

    Learn a couple of simple option trading strategies that traders can use to hedge an existing market position and protect ... Read Answer >>
Related Articles
  1. Trading

    The Three Most Notorious Rogue Traders

    The conviction of former Barclays trader Tom Hayes has once again shone the spotlight on rogue traders. Here are three of them.
  2. Trading

    The World's 10 Most Famous Traders Of All Time

    A review of the most famous and infamous traders in history.
  3. Financial Advisor

    A Day In The Life Of A Day Trader

    Day trading has many advantages and, while we often hear about these perks, it's important to realize that day trading is hard work.
  4. Trading

    The 10 Worst Mistakes Beginner Traders Make

    Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors, which can result in costly mistakes.
  5. Trading

    How Much Trading Capital Do Forex Traders Need?

    Even a small pip profit can mean substantial percentage returns over time.
  6. Trading

    Forex: Money Management Matters

    Currency trading offers far more flexibility than other markets, but long-term success requires discipline in money management.
  7. Trading

    Trading Is Timing

    Learn how to make gains even if you don't get in at the right time.
  8. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
  9. Financial Advisor

    A Day In The Life Of A System Trader

    Systems traders divide their time between trading, developing, backtesting, optimizing and forward testing, to create viable and high-probability trading systems.
  10. Trading

    What Type Of Forex Trader Are You?

    Timing may be the key to uncovering your true strength as a forex trader.
RELATED TERMS
  1. Jerome Kerviel

    A trader for French securities firm Société Générale that was ...
  2. Rogue Trader

    A trader who acts independently of others - and, typically, recklessly ...
  3. Nick Leeson

    A former manager with England's Barings Bank, Leeson became a ...
  4. Barings Bank

    A British merchant bank that was started in 1762, and for centuries ...
  5. Trader

    An individual who engages in the transfer of financial assets ...
  6. Day Trader

    A investor who attempts to profit by making rapid trades intraday. ...
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center