BarroMetrics Views:

A recent story in Bloomberg (http://www.bloomberg.com/apps/news?pid=20601087&sid=avuSh1tOi.Wg&refer=home) reveals that MF Global (London) was ordered to pay a day trader around US$30M. The judge ruled that the former MF Global account manager had intentionally deceived the day trader, Raj Gill by telling Raj he was making money whereas in fact, he was losing money - to the extent that Raj wiped out his account of almost US$20M account.

His Honour ruled that “Had it not been for Mr. Gill being ensnared in the web of deceit”,  he (Gill) would have made money from his trades”.

If the ruling is correctly reported, I wonder what has happened to personal responsibility?

I have no argument with the awarding of  damages; I’d view even punitive damages as appropriate given that the account manager intentionally lied to the client - something MF Global admitted.

But I have to wonder how any trader can believe he is making  money when in fact he is losing money - to the tune of US$20M. I’d say this even if the account manager had discretionary authority. There was no suggestion in the reporting that Raj’s account had been falsified - the admission was he had been lied to. If this is so, wouldn’t  Raj  at least checked his statements?

One of the cornerstones of my approach is to not only keep accurate records of my trades but to also derive statistical benchmarks. The records can warn me if:

• I am entering an Ebb stage
• If a strategy is working outside its statistical boundaries - this could mean market conditions have changed. A great example of this was when I bailed out of the market in October 2008 because every instrument I traded had average true ranges that exceeded my tolerance. Without keeping records, I would have been unable to quantitatively assess the tolerance.
• Help me determine my Maximum Adverse Excursion and Maximum Favourable Excursion - measures that help with stops and profit exits ….and so on.

The point for me is this: anyone who says “I won’t keep records but had I known I was losing money, I would have changed to a winning strategy” is kidding himself. Not that I don’t believe he would not try to change. But without records, he would not know how to change effectively.

For those that are legal minded, the reference to the case is: Parabola Investments Ltd. v Browallia Cal Ltd., No. 2006-855.

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