Monday, January 28, 2008
SockGen: Part Deux
Societe Generale's management has denied that its unwind of $74 billion of European equity index futures last week affected the markets. As quoted in the Financial Times ("SocGen raises questions over Fed rate cut", Jan. 24, 2008), Philippe Collas, the head of asset management at the bank, said, "It’s not possible that our covering operations contributed to the market’s fall."
An analysis of SocGen's positions speaks differently. The bank stated they had positions of €30 billion in Eurostoxx 50 index futures, €18 billion in DAX futures and €2 billion of FTSE 100 futures.
Those positions correspond to 60%, 50% and 20% of ordinary daily volume in the respective futures contracts -- substantial portions by any measure.
However, Monday, January 21 was not an ordinary day: the U.S. markets were closed for Martin Luther King, Jr., Day. When the U.S. is on holiday, European liquidity is vastly diminished. In 2007, on days when the U.S. equity markets were closed, these futures contracts traded only a third their ordinary volume.
So, in fact, SocGen held 200% of U.S.-holiday volume in Eurostoxx futures, 150% in DAX, and 60% in FTSE. Assuming the bank sold a third of its positions on Monday, it dumped over 50% of U.S.-holiday volume on the European markets.
As any futures trader will tell you, trades like that can easily move a market lower, particularly when selling into market weakness, diminished liquidity and rumors of trouble at a large French bank. --GAHjr
An analysis of SocGen's positions speaks differently. The bank stated they had positions of €30 billion in Eurostoxx 50 index futures, €18 billion in DAX futures and €2 billion of FTSE 100 futures.
Those positions correspond to 60%, 50% and 20% of ordinary daily volume in the respective futures contracts -- substantial portions by any measure.
However, Monday, January 21 was not an ordinary day: the U.S. markets were closed for Martin Luther King, Jr., Day. When the U.S. is on holiday, European liquidity is vastly diminished. In 2007, on days when the U.S. equity markets were closed, these futures contracts traded only a third their ordinary volume.
So, in fact, SocGen held 200% of U.S.-holiday volume in Eurostoxx futures, 150% in DAX, and 60% in FTSE. Assuming the bank sold a third of its positions on Monday, it dumped over 50% of U.S.-holiday volume on the European markets.
As any futures trader will tell you, trades like that can easily move a market lower, particularly when selling into market weakness, diminished liquidity and rumors of trouble at a large French bank. --GAHjr
