Effective Product Control

CHAPTER 23Rogue Trading

Rogue trading occurs when a trader engages in unauthorized trading, placing bets on the market in excess of their risk limits or trader mandate. To avoid detection, these bets are often hidden by one or a number of concealment mechanisms.

If we hear about rogue trading in the press it usually means that the losses are so significant that they cannot be swept under the carpet by the affected bank. Given the size of the losses, these events make for fascinating case studies. As most rogue traders incur their losses on the balance sheet of their bank, the rogue trading will eventually come to light but how quickly depends upon the effectiveness of the internal control framework.

In this chapter, we will explore rogue trading, the damage it causes and will look at a rogue trading incident in detail. We will also look at another significant control failure that, although was not rogue trading, created more than a storm in a teacup for one CEO.

The Forefathers of Rogue Trading

There have been some high profile and significant rogue trading cases over the past few decades, where traders have risked it all to cover up losses, earn larger profits and preserve or maintain their reputation. Figure 23.1 lists these rogue trading events.

• Nick Leeson: In 1995 Nick Leeson managed to wipe out all the capital of Barings Bank and force its collapse whilst trying to recoup losses from operational errors. Leeson lost £827 million¹ of Barings’ money through exploiting ...