The risky business of trading

Primarily it's the sense of security, when you know your counterparty is a major financial institution as opposed to a little-known online trading company. This may sound ironic, considering just last week Bloomberg reported that Nick Leeson may begin trading again. To be fair, he did say he'd be trading only with his own money at risk.

In the same week, a London-based online foreign exchange broker called Profinum had to close up shop. The company was set up by private traders targeting small- and mid-size traders, with its motto "for traders by traders".

A visit to the website tells a rather unfortunate story. A single page with a letter to its clients reads: "Due to a system malfunction and the extreme volatility seen last night, we have sustained a large loss. In order to secure Client funds, we have no choice but to stop the online trading service. All positions that are still open at 11am GMT on March 5 2007 will be closed out at market price at that time." There is also a request to send a signed withdrawal form.

Mika Liebkind, chief executive of Profinum in London, said there was a problem with one of the company's servers that lasted a few minutes. Unfortunately those few minutes coincided with very volatile market conditions, and by the time this was spotted it was too late.

He said the losses were made on the company's own accounts with around 90% of all client funds wired by last Thursday (March 8). Those clients that haven't sent the withdrawal form will continue to be contacted by Profinum. He said: "The customers will not suffer any loss because of this."

Liebkind stressed that the malfunction took place on its own server, with technology licensed from New York-based online retail foreign exchange platform vendor ActForex not at fault.

A spokesperson for ActForex said that the company has 40 licensees for the system that use different business models, with some successful and some not. He said that sometimes good technology does not mean a successful business, but that the company endeavours to provide support where it can.

As unfortunate as this is, it does highlight a couple of important points. There can clearly be a lack of risk management and controls at some smaller platforms, if a company can shut down completely because of losses made on its own account. And, traders are good risk-takers, not good risk managers.