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The Black August

07 September 2015

Almost traditionally, in August and September the world’s financial market shakes. Not every year, but when it does, it shakes very seriously.

August, 1998.  Russia defaulted on its bonds due to following big sales of securities on the world’s markets. The major reasons of the default in Russia were a huge national debt and low prices on oil, gas, and other raw materials.

September, 2001.  There was the terrorist attack on the Twin Towers. There was the collapse in prices and the close of the stock exchanges.  As I remember now,  I was working in the broker company, on the 18th floor of World Trade Center Moscow. I was clear to me the horror that was going on in New-York, and looking at Moscow sky from 18th floor, I understood how lucky I was. On this awful day, first, the stocks of companies fell sharply which was connected   with the occurring events: airline United and American; insurance companies and the companies which were staying in the World Trade Center. After 11th September, prices of United Airlines’ stocks fell from $30,82 to  $17,50, more than 43%. American Airlines’ shares went down from $29,70 to $18,00 or approximately 40%. Insurance company Munich Re of Germany got  about 2 billion dollars worth of losses, AXA Group of France lost 0,55 billion dollars, a Swiss Re of Switzerland lost 1,2 billion pound sterling.  The head office of the Morgan Stanley company took 22 floors in the north tower WTC. After September 11th its shares lost 13%. The company Merrill-Lynch had the head office near with “Twins Tower” and its shares fell 11.5%. The Bank of America had an office in WTC too and lost 11.5%.

August-September, 2008. In 2008 in the world began a financial crisis, which was shown in a strong decline of the key economic indexes in the majority of developed countries. The causes of crisis were an excessive in the loan market and therefore mortgage crisis, high prices of the raw materials, and the overbought stock market. September 15, 2008 the American bank Lehman Brothers owed 613 billion dollars and brought court action for banking failure. Lehman Brothers’ bankruptcy was the largest in the USA’s history. The Ruin of the American investment bank, the fourth largest in size, negatively influenced the main exchange quotations in many countries and negatively affected the price of energy carriers. Oil went down in price from $147 to $40 per barrel. The falling of the stock market in October, 2008 was a record low for the USA’s market for the last 20 years. This decline for Japan was the biggest in all of its history. Meanwhile in Russia, the fourth biggest banks, Gazprombank, VTB, Vnesheconombank and Sberbank refused all transactions in repurchase agreements, slowly collapsing the stock market in Russia. It was falling several days in a row. There were days when the stock market opened and closed at the same time because the quotations went down more than 12%.

August, 2011. The decline began on the world stock markets in the first week of August. The Russian stock market index RTSI fell in 22% on the  10th  of August, 2011. The Dow Jones Index went down 11%. Two economic events preceded this decline of the stock markets:

  • second  of August the president of the USA, Barak Obama, signed the national debt law approved by Congress to avert technical default
  • 5th  of August, the rating agency Standard & Poor’s reduced the debt rating  of the USA from  AAA to AA+ 

August, 2015. On Thursday, August 20th, the American stock market fell 2% that scared an already strongly player’s market. On Friday, the situation was redoubled when the stock market fell 3% more and set  a record decline from 2008. On Monday the 24th of August the stock market made a powerful breakthrough and flew 4% down. I don’t see, unlike events of earlier described years, the fundamental reasons for this decline.  However, the American stock market consolidated on its historical top of about one year and the apparent correction became a dumping of ballast for the further market movement.  We were ready for a fall and wrote about such a scenario in our article “Russian” hedge funds. The performance for the sixth month of 2015. ΕΑΜ stocks&derivatives strategies hedge fund made some profit (+0.47%) while the index S&P500 went down 6% in August.

Misfortune never comes alone

On the 11th of August, the Security Exchange Commission USA lodged complaint ¹2015-163 about some companies and persons making transactions using insider information. Our second broker company Exante was included in the list of the suspects. SEC froze all transactions in and out of Exante for their clients and began a legal investigation. These clients can’t transfer their assets. According to open source and heard from one of Exante’s director Vladimir Maslyakov, Exante gave the SEC all documents and transactions for every client to prove  innocence for their  clients.  Vladimir Maslyakov assured  all clients their accounts were segregated and the blocking of  assets  helped to save them in case of the company’s bankruptcy.  Our fund tried to stop all transactions in Exante trying to transfer unsuccessfully the assets. After that we bought ETF SHY and gave the order to transfer them to the broker company InteractiveBrokers, but Exante didn’t transfer our securities. 

I had the situation already when the SEC froze the activity of the banks and broker companies. Accordance to my own experience, I can suppose that if Exante segregates correctly the clients’ accounts then all clients will get their assets.   I faced the same situation when I had the broker accounts by the broker companies MAN Financial and REFCO. When these companies confronted with problems, I bought the securities on all money and transferred them to the other broker company during 6 months. Therefore, I suppose that our chance to lose our assets is low. In this regard, I always insist on keeping the securities for a margin requirement rather than money. This way allows reducing the risk of the bankruptcy of the broker company. When you keep money on the broker account then this money doesn’t have identification with you because all clients’ money is kept on the shared money account. If you have the security, then they keep in the custody on your personal custody account like your personal property. Money is not the property because money can’t be identified by the client. 

For example, clients’ money in the bank keeps on shared account and the bank uses them in its commercial activity. If you buy the property, for example the house or the apartment, then the state structure makes registration that this property belongs to you. There is the same situation with the security because one is your personal property. Exante keeps the clients’ security in the American custody LEK.  After the investigation SEC should release our blocked accounts because our hedge fund didn’t have insider trading. The time is necessary for this investigation and  therefore there is nothing to do but to wait and prove the innocence.

 

 

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