A lesson for all those trading on margin / with leverage or holding short positions…
Joe Campbell, a retail trader with $37,000 and change in his E*Trade online trading account, woke up this morning owing E*Trade more than $106,000.
Well it turns out that Joe kept a short position open on a down-on-its-luck pharmaceutical company called KaloBios Pharmaceuticals Inc (NASDAQ:KBIO). KaloBios had actually announced last week that it was going to wind down operations, as it is running out of cash in developing a few cancer drugs which had yet to show real promise.
With KaloBios shares still trading in the $1-2 range, Joe thought that it might be a quick and fairly safe way to make some money riding KaloBios the rest of the way down.
But it didn’t turn out that way.
Late Wednesday KaloBios announced that more than half of its stock had been acquired by Martin Shkreli, a famed biotech investor and entrepreneur, and founder of Turing Pharmaceuticals, with a net worth of more than $100 million. KaloBios and Shkreli are apparently in discussions to keep the company operating.
And KaloBios shares? They soared – more than eight-fold – from around $2 at close Wednesday to $16-$19 in after hours trading. Creating a huge hole for Joe, and any other KaloBios shorts.
So on Thursday, Joe turned to GoFundMe, looking for at least $5,000 from generous souls to help cover the $106,000 he owes E*Trade.
Forex traders would know Joe’s problem as one of negative balance. At most Forex / CFD brokers, there is an implied (and sometimes explicit) agreement between broker and client that the client can never lose more than he or she has on deposit. For those brokers and clients outside the US, it may be near impossible to collect on negative client balances even if a broker were to try.
However at most US online brokers that is not the case. In E*Trade’s case, they specifically cite on their website regarding the risks of short selling that:
When you buy a stock outright, and the stock price drops, the most you can lose is the amount you originally invested. When you sell a stock short, however, your losses are theoretically unlimited – the higher the stock price goes, the more you could potentially lose.
So how has the GoFundMe crowdfunding crowd treated Joe?
There’s good news and bad news.
The bad news is that most of the multitude of comments (104 as of the time of writing) are not of the complimentary kind. Some of them include:
I am sorry for your loss but asking others to pay for your stupidity is unethical at best.
Sorry Joe – only banks that are too big to fail get bailouts.
I’d say you’re dumb and you should stop trading. It’s obvious you’re in way over your abilities.
Contributing to this is like giving a bottle to an alcoholic.
But given his new financial situation, even if he isn’t thick skinned Joe probably doesn’t care much about the insults. The good news – and what Joe probably does care about – is that the crowdfunding effort seems to be working. In the 16 hours since launch Joe has raised more than $2,700 toward his $5,000 goal from 116 generous contributors. His plight has garnered more than 1,000 Facebook shares and 400 Tweets. Not quite enough to cover a $106,000 hole, but getting there.
The lessons to be learned here? Well we’re all a lot smarter with 20/20 hindsight, but beware all shorts, certainly the overnight kind. And if you trade short or with margin / leverage, trade with a broker providing negative balance insurance, if you can.