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Thursday, September 22, 2011

Going rogue is in vogue

It appears that little was learned from the Jerome Kerviel Société Générale rogue trading event. However, this time it is UBS that is attempting to explain to shareholders why it has fallen into the same trap of failing to identify fictitious trades on its books.

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Rogue trading takes on many shapes and forms, although the underlying motive is usually driven by a sense of pride, greed or desperation.

In the case of pride; a trader fears to be beaten by the market, a psychological place that directly and perpetually questions their inner ability to resit being conquered. What can be worse than to have their credibility threatened as a trader among their peers.

In a dangerous move some traders will try to save face by increasing their position, standing on with their strategy and even deepening it. Their hope of course is that a quick turnaround in the markets will save all including that far-flung respect from their buddies that they actually compete with rather than truly befriend. This kind of sentiment is akin to a gambler who believes his luck must eventually change and there is nothing illegal with this kind of thinking as long as the trader doesn’t attempt to conceal the positions they are taking. That is the line which must not be crossed.

In the Barings Bank case Nick Leeson had the authority to increase his limit without raising concern because he was not only the risk taker but also involved in the settlement of the positions he was taking. This is a fundamental design flaw in policy for that bank and most institutions have already closed this loophole by erecting Chinese walls between the traders, risk management and middle office.

The National Australia Bank episode was different and FX traders turned off controls by misreporting but unfortunately for the NAB team, a whistle blower brought the game to an end. It was quite tragic might I add and a week after the regulator walked in to close NAB's FX desk; the traders were on the hook and televised in Technicolor for all to see, the CEO was pulling coffees in the lobby and the markets swung into favor of all of those involved. Unfortunately, it was all too late for any accounting vindication to be effective. 

Booking fake hedges is a more elegant way of attempting to reduce risk without actually doing it. What appears to everyone away from the trading floor is a business as usual response to overly deep positions but the fail safe hedges are nothing more than synthetic at best. 

Of course these fictitious positions are never settled as the rogue trader will squared them off before delivery is required. 

So why does a trader do this?

In the paper attached to this link: <The Rogue Trader Link>, we look at the number of traders who have gone rogue over the years and the underlying issues banks need to address to resolve rogue trading disorders.


  1. In Bloomberg Businessweek http://tiny.cc/7tgpm

    "If someone robs a UBS branch or steals gold from UBS’s safe, you can’t blame the CEO for that. The scandal has nothing to do with his performance."

    Interesting point however if the banks risk appetite is skewed and the risk systems are not fit for purpose, who is responsible then, where does the buck stop?

  2. An interesting article from Felix Salmon

    Quote : "The first is a trait common not only to rogue traders, but rather to all animals"

    Thoughts : Nearly all people have a propensity to go rogue, rogue trading is a failure of risk management not the trader.