What is rogue trading?
A rogue trader is somebody who works in a large financial institution and makes independent decisions on buying and selling financial assets, despite not being legally allowed to. Essentially a rogue trader abuses their position by making large speculative bets on the future of financial instruments which could potentially lead to the company which employees the rogue trader losing millions of pounds.
Nick Leeson, Rogue Trader
The phrase ‘rogue trader’ was placed firmly in the public eye in the early 1990’s when Nick Leeson, who held a high position with Barings Bank, made speculative wild gambles on the markets, and successfully (for a while) hid the fact that he was making huge losses. He singlehandedly caused the collapse of the entire bank.
Barings bank was one of the UK’s oldest investment banks and the fact that one person could bring it down sent shockwaves across the world. His story caused such intrigue that it was turned into a film in 1999.
A rogue trader is therefore what every bank or financial institution fears: somebody with enough power and savvy to be able to make large investments and then cover up any losses whilst they continue to trade. This is a disastrous concept for a bank which believes it is trading successfully while in actual fact the business is suffering spectacularly huge losses.
Companies risk regulation and corporate responsibility
Two particular areas of debate are always brought up when a new rogue trader is reported: companies risk regulation and corporate responsibility.
- Companies risk regulation: clearly any bank should not allow one individual to have the power to make millions of pounds worth of losses and continue to do so. Whenever a rogue trader is discovered there is always debate about how no one at the bank knew what was happening. As a result, banks have extensive regulations in place to try to ensure that one single person is not able to make such large risks without another person knowing about it.
- Corporate responsibility: the general public will also find it shocking that people are able to make such large investments or risks with such huge amounts of money. The average person could never dream of earning anywhere near the amount in question and may have shares or interests in the companies that are being traded like playing cards by rogue traders. After a rogue trading incident, here is often talk of trying to ensure bankers have a sense of what they are actually doing in the wider scheme of things rather than simply obtaining a profit.
Rogue trading at UBS
The Financial Services Authority have recently looked into activity at the Swiss bank UBS after one of its traders was found to have gone ‘rogue’ and gambled away £1.3 million. The losses and rogue trading led to serious questions being asked of UBS as to how their internal system allowed this to occur, and there are possible sanctions. The rogue trader himself, if found guilty, is likely to be sent to jail for a long time.