Fresh in the minds of the public is 31 year-old Kweku Abodoli, the rogue trader who lost Swiss bank UBS over $2 billion in unauthorized trades in Exchange Traded Funds (ETFs). The magnitude of the losses and scandal of the fraud and secrecy excited news agencies worldwide. It was by-and-large portrayed as a freak event. However, according to Financial Times columnist John Gapper's new book How to Be a Rogue Trader, rogue traders are actually features of the system.
The book argues that rogue traders are systemic for two main reasons:
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- Banks are willing to take the risk that these people exist in the organisation. If they fret too much over losses, they will never be able to make meaningful profits.
- Rogue Trading is inherent in human psychology. In order to avoid losses, people will often take on massive risks by doubling down. The outcome is usually, well, sub-optimal.
The major cases of rogue trading have been Joseph Jett at Kidder, Peabody in the 1980s, Nicholas Leeson at Barings in the 1990s and Jerome Kerviel at Societe General in 2008. But how many Leesons and Kerviels have there really been? If rogue traders are as ubiquitous as Gapper writes, it only stands to reason that every bank has had their fair share. Likely, the banks keep instances of rogue trading quiet to keep their reputations intact.
| Nick Leeson - The type of person the banks employ. The type most likely to be a rouge trader! (themarketoracle.blogspot.com) |
What are the characteristics of the common rogue trader?
Gapper notes that rogue traders are typically 'outsiders.' They went to the second-tier schools, they worked in the back office, they are trying to make their mark. They also tend to be charismatic, so that they can charm or bully their way out of proper oversight.
What can be gleaned from this analysis? The very personality type banks look for: money-hungry, charismatic young men, are exactly the type of person most likely to be the rouge traders. Banks need to review their psycho-analysis tests and start hiring more conservative personalities. And please, try hiring some women.
