Rogue trading

FA poll: The extent of rogue trading

Respondents to our web poll last week reckon unreported rogue trading is common, but management look the other way if it's profitable.
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Rogue elephant? (AFP) </div>
<div style="text-align:left;"> Rogue elephant? (AFP) </div>

In a short story called ‘‘Shooting an Elephant’’ (1936) about his days as a British colonial administrator in Burma, George Orwell meditates on a dilemma that represented the mutual hostility felt between ruler and ruled. In order to save face in front of an indigenous crowd, the narrator – presumably Orwell himself – feels compelled to shoot a “rogue elephant, which had ceased to belong to its herd”, and was "ravaging the bazaar”.

An alleged rogue trader has again appeared, this time at UBS, and has apparently racked up losses of $2.3 billion. Kweku Adoboli seems to have joined a club of notorious traders that broke from the herd, rampaged through markets and knocked down the rickety edifices that investment banks have so evidently become.

Few of the members of this rogue’s gallery were exceptional traders. Many, such as Barings’ Nick Leeson, Allied Irish Bank’s John Rusnak or Societe Generale’s Jerome Kerviel had ostensibly fairly mundane responsibilities, putting on simple arbitrages or hedges, and several, like Adoboli too, had been promoted from clerical positions in the middle or back offices. It seems they went beyond their limited briefs, and decided they wanted to be stars – winning in the trading jungle and making wads of cash for themselves and their banks.

After all, that is what traders do. And, of course, it can be tempting to cross lines, breach internal rules and, once dug in deep, break the law. Technology, systems and human supervision are meant to ensure things never get that bad.

But, as Richard Abbey, senior managing director of financial investigations at Kroll, told FinanceAsia last week, “these types of frauds are likely to continue to happen. It is impossible to guarantee that someone committed to finding a way to breach systems and controls won’t find a way to do so.”

The results of our recent poll suggest that readers believe rogue trading is far more prevalent than revealed by the occasional high-profile scandal. A legitimate inference would be that it only becomes a significant issue when the sums involved are so vast that they cannot be hidden.

The majority of respondents (52%) think that rogue trading is “very common”, but that banks decline to call in the police if they have booked unexpected profits. This incidentally, was one of the platforms of Kerviel’s defence. His employers turned a blind eye to his activities – which were practiced by many of his colleagues too – as long as he was making money, argued his lawyers.

Clearly, the past few years have turned a lot of people into sceptics, if not incorrigible cynics. Only 13% of respondents take the rosy view that rogue trading is “very rare”, and that “most traders stick to the rules”.

The third, rather ambiguous option garnered considerably more support. As much as 35% shared a general feeling of uncertainty about what actually constitutes rogue trading.

Perhaps it means simply breaking internal guidelines and limits? Maybe it’s okay if a trader is given a nod-and-a-wink by his boss? Possibly it only matters if the law is broken? Or, could it mean that a trader only turns rogue if he loses his colleagues’ bonuses.

When the narrator in Orwell's short story does his duty and reluctantly fires the bullet into a by then stranded, tormented beast, he reflects that “in killing the elephant he felt he was killing a part of himself”. The UBS board might be feeling something similar.

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