Trading Tips

Rogue trading isn’t just an institutional issue

A recent discussion of rogue traders looks to address the reasons why they do what they do.

Those reasons include:

1) The qualities which make them attractive as employees (can thrive in highly competitive environments, remain calm under intense pressure and have the ability to take risks) are the same that lead to rogue trading.

2) They are motivated by money and that  motivation turns to greed, leading them to take greater risks.

3) The traders’ managers benefit from their risky trades in that their bonuses and such are often a function of the groups’ performance.

4) The trader tries to cover up a mistake to protect both their compensation and their reputation.

Now, most readers of this blog probably won’t be in a position to become a rogue trader in the classic sense. That doesn’t mean, though, that these points don’t have value at the individual level.

Consider just one aspect of the rogue trader thing noted above, the part about reputation. If your trading has an ego and reputational element to it – meaning you gain personal and/or social status enhancement from your trading performance – then you are at risk of become a rogue trader in your own way.

Imagine how you would feel being in a position of having made a big bad trade, the result of which would cause a reduction in your social standing. Can you see how you might hide that loss and/or trade your way out of it (usually to very negative effect)?

If we accept the view that the traits that lead to trading success are those which also sow the seeds of rogue trading – which we don’t necessarily have to do, but let me go with this for a moment – then that means all of us who trade the markets have the potential in us to blow up spectacularly. Just one more reason why risk management is such a big deal.

By John

Author of The Essentials of Trading

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