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Soros’ Worst Trade

August 31, 2017 Tyler Durden 0

Authored by Kevin Muir via The Macro Tourist blog,

There is this Canadian rock star who retired a few years back and took up hosting an afternoon drive-home radio show on a local Toronto station. Sometimes his program includes a segment called, “Damn! I wish I wrote that.” This ex-rock star will play a famous song on his guitar, tell the story of how it came to be, and then end with his great tagline.

Well, I am stealing his idea with my own segment called, “Damn! I wish I traded that!”

And for the first episode of DIWITT, I present the story of George Soros’ worst trade…

In 1987 George Soros was hardly a household name. He had yet to break the Bank of England, and although highly regarded within the small group of Wall Street traders who covered hedge funds, these types of clients were still relatively unknown.

Yet George was still a player who swung a big bat – especially in the burgeoning financial futures market.

In 1987, Soros was convinced the world’s stock market were vulnerable to a correction, but mistakenly forecasted the crash would emanate out of Japan. After all, Japan seemed most bubblicious, and Soros thought the Nikkei’s meteoritic rise was unsustainable.

George put on a large short Nikkei / long S&P 500 futures position. The trouble was, Soros got it wrong. The Nikkei still had a couple more manic years of rising ahead of it, and the ‘87 crash started in the United States instead of Japan.

How did George manage through this period with his large position? After all, US equities suffered their worst one day decline in history.

Let’s have a look at the chart of the S&P 500 futures contract during this volatile week. When you look at the following 5 minute chart, and see how the S&P 500 contract was down almost 80 handles on the day of the crash, it’s easy to be fooled into thinking it might not have been that bad. But you need to remember that the S&P 500 closed at 281.50 on Friday. So Black Monday’s decline on October 19th, 1987 would equal almost 700 points in today’s market. We are trading at 2,460 as I write this, so imagine a crash tomorrow that sends the spooz down to 1,750 in a single session!

Many of us know the story of Friday’s decline that was celebrated by some as the end of the correction, only to be followed by Monday’s gap down and the accompanying collapse. Then Tuesday’s attempted rally that failed, with the scary push down to a new low. Finally, Wednesday’s big gap higher that managed to hold all day.

But how many remember Thursday’s open? Have a look at the monster gap down. The difference between Wednesday’s close and Thursday’s open was over 22%!

That story is not well known, and is the subject of today’s DIWITT and is a trade that Soros would most likely like to forget.

I am not going to tell the whole story, but take snippets out of a couple of books to tell the tale. The first is Tim Metz’ Black Monday. Before we start, you might be confused when the author talks about “cars.” Cars refer to contracts because at one point, contracts were often the amount that would fill one railway car. It was something particular to the CME and seldom used at the CBOT. Often, it gave away a trader’s background. Anyways, on to the story.

October 22, 1987. Chicago Mercantile Exchange trading floor, 9:30 A.M., EDT: The price voltility in the pit has seemed to lose its rhythm and any semblance of predicability, with this terrifying exception: The word has spread everywhere at the CME this morning that Shearson Lehman Brothers plans to sell thousands of cars on today’s opening.


Scott Serfling almost stayed too long in his upstairs office and he had to run for the elevator to make it to his trading desk on time. But he is here now, and today’s opening will burn in his memory:


“Shearson’s floor broker offered 6,000 cars on the opening. Nobody would say anything [that is, make a bid]. Finally he got a bid of 198, down 60 points from Wednesday’s close. And he took it. Then he sold 8,000 more cars in the first minute of trading. It had to cost them $300 million to do that. And then, in another minute and a half, the price was back up to 230,” he will remember.


Serfling’s memory will be amazingly accurate, the Brady Commission report confirms. Noting that the contract opened “an unprecedented 60 points lower,” the Brady report will explain that:


“Apparently it became known in the pit that there was a large customer order to sell several thousand contracts, and given the uncertainty of the market, many of the locals backed away. However, beginning suddenly at 9:30 A.M., the futures began to rally sharply, reaching the 230 level within three minutes. Approximately two hours later, the S&P futures were back above 250.” It was an instant 24% decline followed by a 28% rally in two hours.


Goldman Sachs bought some of the contracts at the opening, Bob Rubin, the firm’s top trading official will confirm.


So did Shearson, acting for its own account, another official will confirm. “I was mad as hell when I found out it was one of our own customers’ sale,” he will add. The seller was high-stakes Wall Street investor, George Soros. “You ought to talk to George about that trade, if he’ll talk to you,” Rubin suggests. But attempts to reach Soros will be unavailing.


The incredible bust will be a miracle that changes the life of one of Sterfling’s local colleagues, who on Wednesday, yesterday, mistakenly neglected to close out a short position of twenty-five cars. The mistake could have been a disaster if the market had opened sharply higher.


Instead, the price break caused by Shearson’s selling will let him buy the twenty-five contracts he needs at less than 200, giving him a profit of “$700,000 to $800,000. I only knew him by badge number and he wouldn’t talk about it. He just walked out the pit, sold his seat, and he hasn’t been seen back on the floor since that day,” Sterfling will recall.

Pretty wild story. I found the part where Rubin and the squid were there to provide the liquidity to the other side of the trade most amusing. And then Bob needling the author to ask Soros about the trade was just a little dickish. But should we expect anything else from a Master of the Universe?

Let’s get another perspective of Thursday’s disastrous opening. The always entertaining Martin Schwartz has a great chapter in his book “Pit Bull.”

At the opening Thursday morning, I was on the horn with Debbie. Prechter was the guru of gurus. If he said the market was going down, there was a good chance it would. Either way, up or down, this market was so volatile that I had to be on top of it. Ding. There was the bell. The market was open.


“Marty!” Debbie screamed into the phone, “Shearson just came with an order for a thousand contracts to sell, at the market!”


“Quote! Quote! Dammit, gimme a quote!”


“Offered at 240!”


“Shit, it closed at 258! What the hell’s going on? Lemme think! I gotta think!” How much was I ahead? A twelve lot short at 255, now offered at 240. Twelve times five hundred times the fifteen-point profit equaled $90,000. “Marty! Offered at 230! Offered at 225!”


“The size! What’s the size at 225?” At this price, I stood to make $180,000 if I could cover my twelve lots short. “What’s the size?”


“Marty, there’s no bids, I dunno! 220! Offered at 215!” Holy shit. What the fuck was happening? The bottom was falling out of the S&Ps. Nobody was making a bid. In over five years of trading S&P futures, I’d never seen this before. “210! 205! Marty, there’s a fill at 202!”


“The size? What’s the size?”


“I dunno, I missed it! 200! Another fill at 198!”


“COVER!!!” I shrieked. The boys in the pit were starting to buy. “Cover the twelve lot, and input it to the clearinghouse right away. I don’t want those bastards ripping up my tickets!”


With the market moving like this, it wouldn’t be unusual for the boys to conveniently forget about a few of their trades. “GO!” Click.


I turned to my screen. The 202 was just coming up, then the 200. Then a 198, 197, 195. Wait a minute! 197. 200. 204. The market had turned around. But that was all right. I had to be covered at no worse than 200. What a killing!


Ring. “Debbie! Debbie! DO YOU HAVE THE TRADE?”


“Marty! I got five filled at 200, but they won’t give me the card on the other seven!” “Where are they now? 210? They’re moving so fast, if they’re not gonna give you the card at 200, buy another five at the market! NOW!” Those fucking bastards. They’d buried my order to cover on the other seven. They’d just ripped me off for at least ten points on seven contracts, $35,000 at least, maybe more. Ring. “Marty, I got five more filled at 210, and the last two at 215. It was the best I could do. They’re ratting out on trades left and right.”


I was shaking. I didn’t know whether to be happy or pissed.


I’d made $290,000 on the twelve lot (5 x 500 x 55 points in profit, 5 x 500 x 45 points, and 2 x 500 x 40 points), and the boys at the Merc had taken about $50,000 in “slippage.” Two hundred and ninety thousand dollars on a twelve lot! That was unbelievable.


What the hell had happened?


It turned out that Shearson’s thousand contract sell order at the market had been on behalf of George Soros’s Quantum B.V.I. Mutual Fund. Apparently, Soros felt like Prechter and had decided to dump all of his fund’s 2,400 S&P futures contracts at the opening bell. According to Barron’s, when the first order to sell 1,000 contracts at the market hit the pit, “the pit traders picked up the sound of a whale in trouble.” They hung back until the offer dropped to around 200, then attacked. The Soros block sold between 195 and 210 and, within minutes, the market had bounced back to 230, leaving a lot of instant millionaires celebrating in the pits. This is one of the most famous trades in the history of the Merc and many of the details subsequently came out in U.S. District Court in Chicago, where Soros sued Shearson for $160 million (subsequently settled out of court). According to Inside Skinny, Soros actually lost $800 million.


“Motty. He was long .up the ying yang and he panicked.” I just remember it as the day I out-traded the great George Soros.


I was still shaking when I went into the apartment.


“Audrey,” I said, “you’re not going to believe this: I just made $290,000 on a twelve lot.”


“Buzzy, that’s wonderful. How long did you have to hold it?”




“Good for you. Now, will you get that briefcase out of the safe. I can’t get to any of my jewelry.”

The part of this story that almost everyone glosses over is why did Soros blow out his position at the open? Did he give an order to punt it out at market? Surely he would understand the danger in this type of order. No, I can’t believe George just told his broker to get it off the sheets at any cost. To me, the only thing that makes sense is that he had a margin call and his broker sold him out.

And then the real question is the handling of the order by Shearson. I dug around some forums and found a couple of great posts on from traders who were in the pit during this time.

Author: Pabst


A couple of things about that Soros order. A friend of mine who was a local that day in the Spooz told me the filling broker (it was a Shearson-Lehman house broker) tipped the order to everyone around him. (I think it was 5000 plus cars). He told locals “don’t bid me, I’ve got a chunk to go” etc.


Not only did he fill the order down to the 180’s (about 30pts below fair value) but he oversold the order and by CME rules he had to take the worst few hundred contracts for himself as part of the error. The error cost Shearson several million. Borsellino and many arbs bought about 2000 on the lows and the market rallied about 20 points in increments of 2-5 points at a crack. A relative of mine was long 200 coming in and bought 200 at the same levels as Lewis and still made money on the day after being down around 6 million early.


Author: skalper


Man u guys brought back some memories. I just stumbled on this thread re: ‘87 crash. I was in the spooz then. I remember going home that Friday (Oct 16) with a bad feeling. Sunday night the big news was Tokyo…down big Monday morning was unreal. U had to be there to believe it. The Shearson desk got a sell order from Soros to sell 2500 futures (old spooz…as in $500 a handle) before the opening bell. U should have seen their filling broker…..offered it all the way down while showing his size. The locals who didn’t have positions just let it fall like a rock. Not a good day to try and pick a bottom. Best story of the day was about a filling broker who went the wrong way on a chunky order, and made a million plus.

I remember reading another book that went into detail about that morning. Unfortunately, I cannot find it, but I remember the famed S&P 500 pit local Lewis Borsellino figured prominently in the story.

The controversy centered around the fact that Borsellino allegedly offered it down ahead of the Shearson broker. He did so by screaming “at 220! at 219! at 218!” Usually, if you offer, you have to show size. So the typical pit order would be “500 @ 220!” On the other side, when you are buying, you put price first, so a bid would be “219 for 25.” With Borsellino’s offerings, he didn’t disclose size so technically he would have had to fill the entire pit for all cars wanted at that price. But no one wanted any of Borsellino’s offerings, so he was just pushing down the price ahead of Shearson’s (Soros’) order. Did Borsellino collude with Shearson, or did he just smell blood?

Either way, the pit ripped Soros’ face off in what has to be the wildest open in the history of futures trading.

And all I can say about Borsellino’s, the other pit locals’, and Goldman’s purchases from the greatest trader who has ever lived is, “Damn! I wish I traded that!”

*  *  *

There’s an ETF for that!

The other day an astute overseas reader emailed me to explain that he didn’t have access to the ICE futures contract for the CDX High Yield swap (highlighted in my article As Cool as Carl), but he found an ETF that held the exact same OTC swap contract.

As I have mentioned, I don’t have any desire to short high yield credit, but I know I am in the minority. For those who want to hang out with the hedge fund gurus all betting on the next 2008, the ProShares ETF WYDE might be just what you are looking for.

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Can Mexico Capitalize On This Golden Oil Opportunity?

August 31, 2017 Haley Zaremba 0

As the political and economic climate in Venezuela continues to deteriorate and oil output sinks to new lows, a production vacuum is opening up in the Caribbean. Seeing an opportunity to take up the gauntlet, the Mexican finance and foreign ministries are working hard on a plan to become the region’s new reigning oil producer. The plan begins in nearby Cuba. Venezuela had been providing Cuba with generously subsidized oil for over a decade, making the region entirely dependent on agreements and alliance with Caracas. Now Mexico is considering…

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France’s Charlie Hebdo Magazine: “God Drowned All The Neo-Nazis In Texas”

August 31, 2017 Tyler Durden 0

We suspect readers will want to put down any sharp objects and find a ‘safe space’ before noting the following.

Controversial French Satire magazine Charlie Hebdoand victim of a 2015 terror attack that killed 12 staff-members after mocking Mohammed in a cartoon – has perhaps one-upped itself with its latest shocking cover mocking victims of Hurrican Harvey.

For those whose French is a little rusty – the ‘cover-art’ of neo-Nazis drowning says “God Exists! He Drowned All The Neo-Nazis In Texas”

We suspect some ‘armed’ citizens of Texas may be a little upset by this as they deal with over 30 dead and 10s of 1000s stranded.

As TheWrap reports, the cover is presumably poking fun at the tragic events in Charlottesville earlier this month when violence erupted at a White Supremacy rally, killing three people. Users quickly rushed to Twitter to criticize the cover, with many people noting that the magazine has the right to print whatever it wants.

“Free speech is wonderful isn’t it, Charlie Hebdo? You have every right to publish this, and I have every right to call you a piece of s–t,” one user wrote.

Of course this is safe for them. Charlie Hebdo knows a team of evangelical Texans will never storm their offices shouting “Praise God”

— ????JustJoan ???????? (@6thgentexan) August 31, 2017

@dagenmcdowell Charlie Hebdo should recall how many Texans died kicking Nazis out of France

— mpav (@mpav) August 31, 2017

Still, perhaps most ironic of all is that Houston’s Harris County – the region most devastated by Hurricane Harvey – voted for Hillary in last year’s election and over 50% of the population is non-white.

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KBR to study Papua New Guinea energy hub

August 31, 2017 Latest News 0

State-owned Kumul Petroleum Holdings Ltd. (KPHL) has let a contract to KBR Inc.
for conceptual development and feasibility study services for an energy
hub in the Kikori region of Gulf Province, Papua New Guinea.The post KBR to study Papua New Guinea…

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Russia’s Gazprom Neft & LukOil Team Up To Develop Iranian Oil Fields

August 31, 2017 Tsvetana Paraskova 0

Russian oil companies Gazprom Neft and Lukoil have filed plans to develop oil fields in Iran, the National Iranian Oil Company (NIOC) said in two separate statements this week. Lukoil, together with Indonesia’s state firm Pertamina, are proposing to develop the Mansouri oil field in southwestern Iran, NIOC said on Wednesday. Back in February this year, Pertamina was proposing to develop two oil fields in Ab Teymour and Mansouri, which the Indonesian company had estimated at containing 1.5 billion barrels of oil reserves. Gazprom Neft, for…

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Russia’s Gazprom Neft & LukOil Team Up To Develop Iranian Oil Fields

August 31, 2017 Tsvetana Paraskova 0

Russian oil companies Gazprom Neft and Lukoil have filed plans to develop oil fields in Iran, the National Iranian Oil Company (NIOC) said in two separate statements this week. Lukoil, together with Indonesia’s state firm Pertamina, are proposing to develop the Mansouri oil field in southwestern Iran, NIOC said on Wednesday. Back in February this year, Pertamina was proposing to develop two oil fields in Ab Teymour and Mansouri, which the Indonesian company had estimated at containing 1.5 billion barrels of oil reserves. Gazprom Neft, for…

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About That Debt Ceiling Crisis…

August 31, 2017 Tyler Durden 0

With just one month left until the “X Date”, better known as the first day on which Treasury has exhausted its borrowing authority and no longer has sufficient funds to pay all of its bills in full and on time, and also known as the date the US is technically in default on its debt obligations and would be forced to prioritize debt payments according to that infamous 2011 Fed transcript

… traders were hoping if not for resolution, then at least a modest dose of optimism in the days ahead: after all with Houston reeling, the last thing the US needs is a full government shutdown in addition to the emergency crisis in Texas.

Alas, that’s precisely the opposite of what is taking place in the market, where the September/October Bill Spread has again blown out to record levels…

… making the October T-Bill “hump” the worst it has been yet.

One potential catalyst for the spike in odds of an adverse outcome is that earlier today, the chairman of the conservative House Freedom Caucus said aid for victims of Hurricane Harvey should not be part of a vehicle to raise the debt ceiling.

Quoted by The Hill, Rep. Mark Meadows (R-N.C.), a Trump ally who leads the conservative caucus, said disaster aid should pass on its own, apart from separate measures the government must pick up in September to raise the nation’s borrowing limit and fund the government.

“The Harvey relief would pass on its own, and to use that as a vehicle to get people to vote for a debt ceiling is not appropriate,” he said an interview with The Washington Post, signaling agreement with Trump on the approach. It would “send the wrong message” to add $15 to $20 billion of spending while increasing the debt ceiling, Meadows added.

Ironically, it was precisely the Harvey disaster that prompted Goldman yesterday to lower its odds of a debt ceiling crisis from 50% to 33%, on the assumption that it would make conseratives more agreeable to a compromise, when in fact precisely the opposite appears to have happened, and the new dynamic is now playing out in the market where the odds of a government shutdown have never been greater.

So what does it mean for the US if the T-Bill market is correct and a debt ceiling deal is not reached in time over the next 30 or so days? For an unpleasant perspective on what may happen next, here is Deutsche Bank’s preview of what a debt ceiling crisis would look like:

Guide to a Debt Ceiling Crisis


If Congress doesn’t act in time and the above fallbacks are deemed untenable, the Treasuries with affected principal or coupon payments would likely be handled in two ways, according to scenarios considered by SIFMA. The first option would extend maturity and coupon payments, where payment decisions are explicitly announced by Treasury one day at a time, and both coupon and principal payments are ultimately made in full once the debt limit is raised. These securities would be able to be transferred normally, and a market for them would develop. While the security is not “defaulted” as its maturity date has been extended in systems, the extension would likely constitute a change in terms that triggers CDS.


The other outcome would a failure pay , where Treasury does not set a date for future payment, and there is no pre-announcement (or it comes last minute). A failure to pay would mean the affected securities drop off the Fed system and cannot be transferred normally. A market would eventually develop, but once there is a failure to pay and the securities are not extended in systems, they cannot be “unmatured” and maturity extended.


Regardless of whether it is a payment extension or a failure to pay, the longer Treasury remains in default, the worse the situation for financial markets. Market reactions and market functioning might be comparatively stable at first, but the concern is of widespread panic and systemic market disruptions.


As for immediate ramifications, noted that CDS would likely triggered either default scenario , as sovereign CDS is triggered by either a failure to pay, repudiation/moratorium, or a restructuring. A failure to pay occurs when a sovereign doesn’t pay principal or interest when due, with a 3 day grace period applying to that due date in the case of the US. In our view, a CDS trigger would apply to all debt obligations backed by the full faith and credit of the US government (including GNMA, FHA securities, etc.). A CDS event is unlikely to have much direct market impact, however, as net CDS exposure is a modest $1bn as of the end of July, down from about $4bn in 2013 and its peak near $6bn in 2011. As long there is no one particular bank that is overly short protection, we do not expect any knock-on CDS event. 5y CDS is currently suggesting no real concern, sitting at the bottom end of its 19-24bp ytd range. While the supply of deliverable securities is more than adequate to satisfy the outstanding contracts, demand deliverable bonds may cause distortions . The 2.25% Aug 2046 bonds are currently the cheapest-to-deliver into the CDS, and would likely trade upward in price towards recovery value.


Among Treasury market investors, money market funds are a key group possible propagation risk . Even after money fund reform, government funds continue to be quoted at a stable $1 NAV, leaving them vulnerable to perceptions around “breaking the buck,” and therefore large scale investor redemptions in an extreme scenario. Treasuries accounted for $678bn of money funds $2.7tn AUM as of the end of July, while Treasury repo makes up another $595bn (with about $150bn of that made up by RRP’s with the Fed). Money funds’ Treasury holdings tend to be concentrated in securities maturing in the first month – more than 40% of their Treasuries held at the end of July matured in August. This suggests that the bias will be for money funds to accumulate more securities maturing around the debt ceiling, though they may be cautious around specific issues. However, it’s worth noting that they then owned over $40bn combined in the October 5 bills, October 12 bills, and October 15 coupon maturities – more than 20% of the amount  outstanding. Of the $1.3tn of Treasuries (bills and coupons) that mature between October and mid-January, money funds own about 19% – potentially an important factor in the event that a default drags out. Also note that maturing notes and bill holdings are concentrated in a relatively few fund families.


Potential outflows from money funds has implications repo market . Possible forced selling of Treasuries, money funds would likely cut back on their provision of financing to banks through repo. While reforms have reduced banks’ reliance on short term funding and put them in a place to better withstand a significant reduction in availability of things like repo funding, a sharp contraction in overall repo financing would likely have ramifications for market functioning and liquidity.


In terms of market plumbing, given the reliance Treasuries managing credit risk derivatives , a default event could spread quickly to derivatives market via a sudden drop in the valuation of UST collateral. This loss in value would trigger calls for additional collateral, and given the widespread use of UST’s, it is possible that a number of market participants fail to post sufficient collateral; this would constitute a default in a centrally cleared trade. The requirement that the surviving counterparty replace the risk of that trade could subsequently result in a major revaluation of all related trades, triggering new collateral calls, and potentially create a vicious cycle.

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Russia’s Comeback In The LNG Race

August 31, 2017 Viktor Katona 0

In a little more than a month’s time, Russia will formalize its claim for a bigger role in the ever-expanding global LNG market. Early October, when the Yamal LNG will see its commissioning and first cargo delivered, expect to hear “Russia” and “LNG” in the same sentence in increasing frequency. Yet in Yamal LNG, Russia’s bid to consolidate its claim as a gas stronghold and to garner at least 10% of the global LNG market, one can discern a quite unconventional project for Russia. Although led by NOVATEK, a non-state-owned…

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