posted on Jun, 9 2004 @ 06:14 AM
In my experience the bank's work a little something like this:
They are aware of a possible SEC investigation before it is released to the public, so they do the following:
Say ABC company is trading on the NYSE at $100 per share, and the trader has $1,000,000.00 of the bank's cash to invest on that day.
Firstly the banker, working on a hunch that the SEC investigation will be released shortly will 'short' the ABC stock to the tune of $1,000,000.00,
knowing that the press release will have a negative impact on the stock and it will fall. Shorting is selling stock that you do not own, and is the
opposite of going 'long' ie. buying the stock.
He short's ABC at $100.00 per share, and over the next few days ABC shares fall to $50.00 per share. He then buy's 10,000 shares (what he shorted
originally: ($1,000,000 divided by $100 = 10,000) at $500,000.00, giving a total gain of $500,000.00 on the trade.
Now, he doesn't stop there. Knowing that the SEC investigation will not adversely affect the stock permanently and that it will regain some of it's
loss very quickly he will now buy in the traditional sense. He now has $1,500,000.00 at his disposal, so piles all that back into ABC (going long this
time) at $50.00 per share.
The stock regains half of it's loss very quickly and the trader sells at $75.00 per share.
This means, overall, he made $500,000.00 on his first trade (shorting ABC), then he made $750,000 on his second trade (going long in ABC).
His original stake of $1,000,000.00 is now up to $2,250,000.00, and the banker has weathered a volatile stock and market well.
This is textbook trading, but is often not as simple as this. What it shows is that banks can still make plenty of cash whatever the market is doing.
The very worst thing for a bank is when the market is stagnant with no big gainers or losers.