Going Rogue

What’s up with rogue traders?

The story is familiar: a clever, energetic young man working in a bank’s treasury subverts the department’s controls, makes a few bad bets, and then compounds his errors by doubling down. The longer the process goes on, the greater the eventual losses become. Sometimes the bank fails as a result.

They seem to pop up every couple years. In the 1989 best seller “Liar’s Poker” Michael Lewis describes several multi-million dollar incidents; since then we had Nick Leeson at Barings, Joe Jett at Kidder, Jerome Kerviel at SocGen, and many others until most recently Kweku Aduboli at UBS. The failures of AIG and MF Global were really rogue trading by senior executives.

Sometimes rogue traders are trying to game the system and personally profit by taking excessive risk with someone else’s money, but often there seems to be no connection between their pay and the success of their strategies. What could motivate these rising stars to risk their careers on such long-shot bets?

But sometimes rogue trading isn’t. It’s really, really easy for management to pin its own failures on a young, inexperienced subordinate. The trader’s silence is purchased with a severance package, and he goes to work somewhere else. Management saves face, and no one is the wiser.

We’ve had rogue trading as long as we’ve had trading—and as long as we’ve had management eager to hide its own incompetence.

Douglas R. Tengdin, CFA
Chief Investment Officer
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