Miracles happen

“Those “three witches” are just a myth, nothing unusual is going to happen” – I said today around midday, while disputing the possibility of turmoil on the Polish stock market. Indeed, three, six, or nine months ago third Fridays of last months of the quarters were absolutely normal in terms of stock volatility.

Those who are not interested in the stock market deserve an explanation. Today futures and option contracts on WIG20 were settled. Futures contract is pure bet – you buy or sell it and try to bet what the value of stock index (in this example) will be. If you go long and the value is higher than you bet, you win, if you go short you win when the index drops.

A small investor can use them speculate on WIG20 or to hedge their portfolio of stocks. A fat guy (as we call in Poland those big players who sway the market) who has a big portfolio can rig the market and thus reap profits of billions. Futures have a built-in leverage of ten. To put it simply, if you go long in such a contract, if a stock index goes up by 0.8%, you gain 8%, but if it declines by 1.4%, you lose 14%.

Now let’s look how a big investor rigged the market today. An index value used for settlements is an average value of WIG20 in the last hour of trading session. It was quite easy to place a few substantial purchase orders to push the index up by two per cent and get the benchmark value much higher than the futures value. Before the end of trading the same stocks were sold, WIG20 plummeted as unexpectedly as it had soared and closed 0.16% below yesterday’s close.

Upshots:
A big investment bank or investment fund raked in profits or around 17%
Thousands of individual investors are licking wounds and counting up losses also of around 17%.
Polish financial supervisory body has launched an investigation over market rigging.

Meanwhile the trading volume has been the highest in the history and exceeded 4.3 billion PLN. The foregone conclusion is that stock market is not for widows and orphans. Someone who doesn’t know the rules of the game and doesn’t realise the risks shouldn’t enter this casino.