The Martingale Does Not Work — SocGen Uncovers $7bn Fraud

In Did one man cause market mayhem? the BBC’s Ben Richardson identifies the trader and notes that the strategy used was to chase losses with ever greater purchases which eventually amounted to losses in the billions.

In gambling parlance, this is known as the Martingale. Technically the Martingale is simply doubling up. Lose one, bet two. Lose two, bet four. And so forth. If you win after three or four losses, you can eke out your original bet. Casinos rub their hands together whenever a Martingale bettor appears.

In the Stock Market there are clear differences. There is a general presumption that over time the market will rise. Always has, even with setbacks.

Therefore it is possible on taking a loss on an otherwise good issue to buy some more shares at a lower price and profit eventually. That is not a Martingale.

If you actually apply a Martingale to the Market, it could be argued that the only limit is your bankroll since there is no house limit. So you could buy 10 shares of Stock X at $10 ($100) and have the value go to $50 and buy 20 shares for $100 and so forth.

What happened in the case of France’s SocGen is that it was not an individual’s bankroll that was at stake.

But losses were chased. The Martingale Psychology was evidently at work.

The moral may well be, Don’t bet your own money this way. And if you bet other people’s money thus, be prepared for some serious consequences.

The story so far is laid out in the videos below.

SocGen uncovers $7bn fraud — Who Was Involved?

How Was It Done?

Societe Generale uncovers $7bn fraud – 24 Jan 08


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