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.

Trader Resources

Read up on rogue traders

We’ve got another rogue trader in the news. This time it’s UBS and a $2bln loss. You may recall the Jerome Kerviel event that took place during the financial crisis, which had a significantly larger loss associated with it.

[easyazon-link asin=”0751517089″][/easyazon-link]Perhaps the most famous of all rogue traders is Nick Leeson, who brought down Barings Bank back in the 1990s. His autobiography, suitably titled [easyazon-link asin=”0751517089″]Rogue Trader[/easyazon-link], is one I found a good read, and the [easyazon-link asin=”B00002RAPA”]film version[/easyazon-link] isn’t that bad either.

Another rogue trader book is [easyazon-link asin=”0688161367″]Black and White on Wall Street[/easyazon-link]. That one was written by Joseph Jett, who was accused in the early 1990s of creating $350 million in fake trading profits for his employer Kidder Peabody, and earning $8 million in bonuses for himself. Jett was actually featured in a video taped by France 24 focused on the subject of rogue traders (which includes footage of Brett Steenbarger).

Trading News

Another Rogue Trader

If you were completely out of touch Thursday you might have missed the adventures of our latest rogue trader. And this one’s a biggy. He puts Nick Leeson to shame. How about $7bln+ in losses for his employer, French bank Societe Generale. Inexplicably, he’s vanished. Imagine that!

Let’s just say someone didn’t practice very good money management. 🙂

By the way, a lot of folks are blaming this guy for the market insanity this week. He apparently had gotten very, very long (read tens of billions worth) in European stock index futures, especially the DAX. The unwinding of that position, which Soc Gen only found out about on Friday, was a major contributor to the global sell-off.

Rogue Trader - Nick LeesonIn case you never heard the Nick Leeson story (he’s the guy who sank Barrings Bank about a decade ago) you should definitely read his book – Rogue Trader. If you can get beyond the questionable ethics of helping a guy who caused the loss of over $1 billion and the death of Britain’s oldest bank make a few bucks based on his experience doing so, then it’s a interest read. The film version starring Ewan McGregor is ok, but lacks the real depth of the story as Leeson tells it in the book.

Another good read if you’re into the kind of “inside Wall Street” type of book is Black and White on Wall Street. This one is an autobiography written by Joseph Jett, a former Kidder Peabody fixed income trader who was accused of improper trading or accounting or something (it’s a bit unclear) which resulted in substantial losses. Unlike the Leeson book in which he admits to his wrong-doing, this one is an attempt by Jett to tell his side of the story and clear his name. There are some complex financials issues discussed in places, but they don’t really hinder things when you read it.