“Life is part positive and part negative. Suppose you went to hear a symphony orchestra and all they played were the little happy high notes. Would you leave soon? Let me hear the rumble of the bass, the crash of the cymbals and the minor keys.”
A Credit Suisse First Boston employee wrote us to inquire about trend following [read]. That article brought feedback from a Canadian Imperial Bank of Commerce (CIBC) employee:
That’s nothing. Listen to my story. In the tech bull mania of the late 90s and early ’00, I was riding high on the fiber optic train and had built a sizable position in Uniphase (later to become JDSU) and others JDSU was acquiring, including selling naked puts on SDLI (a JDSU acquisition). Next thing you know my firm, CIBC World Markets Corp., starts advising JDSU on M&A and whips an employee restriction on the stock and the stock of the company it is acquiring. I was a broker in the PCD and the restriction also forbid soliciting sales or buys by clients. There was no 30 day rule or 30% loss rule. I tried to sell once at 132 in the summer of 2000 but the firm’s compliance watchdogs busted the trade and put the stock back to me. The restriction ran from around July of 2000 through February of 2001. I was finally free to sell in the 30s after taking well over a $100,000 loss. The put I was short forced margin calls (the firm had a margin requirement on naked puts that was four times the industry norm even if it meant that you had to have margin well in excess of what full exercise would require). I was not aware of that requirement, nor were several clients when we entered the positions.
That employee went on to say:
We weren’t informed until well into the summer of 2001 when the unwinding was causing margin calls that no one would have expected under normal margin requirements…The firm had every reason to know that I was being personally devastated financially but remained silent on the issue. Needless to say, I never intend to build any positions where the firm could possibly have an investment banking relationship. I appreciate all of your insight and guidance. Trends don’t lie.
If you are in a trade that does not allow you to freely buy or sell… get ready for trouble. This only helps trend followers engaged in a zero sum game.
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