How Russian brokers went bankrupt: where your money and securities can leak

Investors are often taught that “your securities are well protected, even if something happens to the broker – they will definitely be safe!” In practice, however, in Russia this is far from always true. In this article, we explore the amazing ways that savvy brokers can still steal your money from you.

Last year, when I often wrote about the political risks of investing through foreign brokerage accounts (for example, here, here and here), I was often reproached for exaggerating and as if drowning for the fact that you need to invest only through Russian brokers.

This, of course, is not true. A good investor should equally distrust everyone at the same time, and keep in mind all possible risk options. So in this article we will go through all the high-profile cases of broker defaults in the history of our country; and at the same time we will try to figure out what needs to be done in order not to become the hero of the next such story. Go!

2003, “Prologue”: this is a showdown, St. Petersburg!

It is ironic, but true: the first of the high-profile bankruptcies of Russian brokers in the 21st century was the case of the collapsed St. Petersburg investment company Prolog (the name seemed to hint at something).

The exchange “Wolves from Rubinstein Street”, who ruled the Prologue, decided that simply cutting commissions from clients is boring, and real money is made only by daring trading. So the guys in 2003 decidedly shorted some Russian stocks for the whole cutlet (that is, they made a bet on the fall of the market). Well, now we already know that at the beginning of the 2000s, the Russian market simply grew uncontrollably like crazy – and then, apparently, there were also enough Armageddon forecasters on the topic “everything will collapse, right about now!”.

When the RTS index once again rushed up by several tens of percent in a couple of months, it suddenly became clear that Prologue lacked not only its own funds, but also clients’ money to close shorts. Looking at such layouts, the Prologue management realized that there was a risk of forcibly defragmenting and lying on the bottom of the Neva. So they quickly vacated the premises of their own office and left in an unknown direction (I wanted to write “into the sunset”, but in St. Petersburg the weather conditions hardly allow it).

As a result, the company’s clients were left without money, and after the Prologue itself, several other St. Petersburg investment companies that practiced all sorts of mutual financial transactions like the “Dutch steering wheel” fell like a train.

Moral: If the broker’s client traded unsuccessfully, then this is the client’s problem. And if the broker traded unsuccessfully, then this is also the problem of the client. So it goes!

2004, “Guta-bank”: the bankrupt who could

In mid-2004, Guta Bank, the country’s 22nd largest commercial bank, suddenly declared its insolvency for many. Since it was a rather stylish, fashionable and youthful bank with Internet banking systems that were very developed at that time, it was also one of the largest brokers in Russia.

But despite the fact that Guta clients had already strained rolls in anticipation of getting delicious horseradish with butter, the story ended well: Guta bought VTB for a symbolic sum of 1 million rubles (well, after another 240 million were pumped out of it in an unknown direction bucks, of course). As a result, Guta-Bank was turned into VTB-24, which for many years was considered a top bank in terms of the most technologically advanced service with a human face (like Tineok now), and its customers got off with a little fright.

You will be surprised, but the former owners for some reason revived the Guta-Bank brand in 2008 (and, it seems, they hired advertisers from Burger King)

Moral: If your broker is a bank, it can suddenly collapse due to some completely unrelated problems with the stock market. But if it is a large bank, then it is quite likely that in the end someone will save it.

2008, KIT Finance: emergency dive

In the 2000s, KIT Finance was a prominent (by the standards of the Russian Federation) investment bank: it seems that even I, being a student at that time, invested through it in my first mutual fund on the RTS index (even then I had the makings of a successful market timer: I did it exactly during the 2008 crisis).

If the previous office headquartered in St. Petersburg (see “Prologue” above) got burned on the short of the Russian market, then with the Kitans (also St. Petersburg, for a minute) the opposite story happened: they sold put options on the RTS index, which in fact are insurance against his fall. Popularly, this option selling strategy is called “collecting pennies in front of a steamroller”: you can get a stable and relatively good income for quite some time, until at some point you suddenly find yourself too flat (and slightly dead).

This happened with KIT Finance: when the Russian market folded about five times during the global financial crisis in 2008, it turned out that there was simply nowhere for the whales to repay the option debt of several billion rubles.

 

Moral: Whether the Russian stock market is short or long, if you do it with leverage, sooner or later you will get fucked. Ah, well, it looks like you need to stay away from brokers from St. Petersburg …

2009, Utrade.ru: u trade? no u don’t!

Utrade was the brokerage arm of Uniastrum Bank, which itself made history in 2008. The bank riveted as many as 78 OFBUs (general bank management funds) – structures that are conceptually similar to mutual funds, but with much more relaxed regulation.

These funds were advertised as an opportunity to invest in reliable Western securities and precious metals, but in fact, high-yield repo pyramids were built inside from repeatedly repledge Russian bonds – which, of course, did not fail to fall apart during the crisis. As a result, 14 funds generally sank by 90% in just 1 (one!) Day, including, so to speak, “protective funds” for gold and silver.

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