Rogue Trading

September 5, 2014

Financial institutions appear to have been falling victim to the phenomenon of “rogue trading” at an alarming rate in recent years.

The losses incurred have been large enough to shake even the most established of houses and send the rest of the market into a mad spin, as they attempt to review their control framework in the light of the newest debacle. If you scratch the surface, you will find that for every Leeson, Adoboli or Kerviel, there is a myriad of much smaller cases handled out of the public eye.

Even those involving the smallest financial impacts will have a huge requirement for management time, draining senior management’s ability to focus on the wider demands of the business. Add to that the negative impact the case can have on an institution’s relationship with its regulator and you have a fairly compelling business case to implement effective controls over your trading activity.

Profiles of rogue traders will often point at “white collar psychopath” types who are extremely competitive and are driven to dizzying heights of dishonest activity in order to look like the big guy on the trading floor. In reality, you are just as likely to find rogue trading cases perpetrated by somebody who made an initial mistake and then created a web of trades to cover this up, that quickly spiralled out of control.

So what tools do firms have for tackling this issue?

Many institutions have taken steps to specifically monitor trading activity, in order to complement the existing control framework. This often means cobbling together inconsistent sources of data from front office trading systems and squeezing the results into very basic reports. These are typically sent out to a multitude of people who cannot necessarily understand the results and much less act on them.

At Brickendon, our approach to this issue is thoroughly understand the trading system inputs that feed any Trade Monitoring system, whether it covers Rogue Trading or the related area of Market Abuse transaction monitoring. By undertaking thorough business analysis, a Trade Monitoring system can be built that produces reliable data, on which intelligent tests can be run. Overlay this with one of our streamlined Operating Models and the result is a process that is much more likely to highlight irregular activity in your business.

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