French Trader Paid Price for Leverage, Hubris

Although the investigation is far from over, it would appear that Kerviel blew up for the same reasons that brought down Brian Hunter, Nick Leeson and so many others: huge positions, zero discipline and an overriding need to be right.

How big was Kerviel betting? Anyone who thinks that the free market can be muscled or manipulated, should consider the fact that Kerviel's trades were valued north of $83 billion dollars, bigger than the bank at which he worked, bigger than the gross domestic product of Slovakia, Qatar or Libya, and the equivalent of about half of France's gold and currency reserves. Sacre Bleu!

The fact that he was able to deploy such immense firepower in his trades — $44 billion into the Eurostoxx index and $26 billion into the German DAX, for example — and still have it move sharply against him shows that nobody is bigger than the market. You can bet an entire multinational bank that XYZ is going to rise... and it can just as easily fall. Whether you are a rogue trader betting billions or Joe Sixpack wielding an E*Trade (ETFC) account, it is impossible to reliably muscle the market into going your way — no matter how much you buy.

When looking at the list of the largest publicized trading losses, it's worth noting that the majority of them were facilitated by trading in futures, options or other derivatives, all highly leveraged contracts that permit big bets with little money down. Whether it's an Internet stock or residential mortgage, oversized positions can be fatal. When the market moves against you — and it always does, eventually — rogue traders and regular folks alike find that leverage can quickly torpedo a portfolio whose risk far exceeds the capital standing behind it.