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Gamekeeper Turned Poacher? The Path to Rogue Trading

Thursday, 15 Sep 2011 | 8:30 AM ET

A bright graduate joins an investment bank, but not in the glamorous, fast-moving – and ultimately profitable - trading role that he wanted. Rather, he is put into the "middle office," managing the IT systems that keep the trading desks running. Eventually, though, he is given a break, joining the bank's "delta one" trading desk, playing arbitrage between cash equities and equity derivatives.

Jerome Kerviel shown here released on bail from La Sante Prison by a Parisian court on March 18, 2008 in Paris, France. Jerome Kerviel, the Societe Generale rogue trader was accused of losing 4.9 billion euros (7.2 billion US dollars) through unauthorised trading.
Franck Prevel | Getty Images
Jerome Kerviel shown here released on bail from La Sante Prison by a Parisian court on March 18, 2008 in Paris, France. Jerome Kerviel, the Societe Generale rogue trader was accused of losing 4.9 billion euros (7.2 billion US dollars) through unauthorised trading.

It is not long, though, before his bets start to go wrong and, forced to cover for his mistakes and win back his losses, he needs to go outside his risk limits.

Fortunately, he knows how to do it. After all, he worked on the systems supposed to curtail risky practices. He knows the team.

After a while, though, the police come knocking on his door. The bank has lost a lot of money, and he is to be charged with fraud.

This, if Societe Generale's internal inquiry into a 2008 trading scandal that lost the bank $7 billion is to be believed, is how "rogue trader" Jerome Kerviel's career panned out.

The "Mission Green" report into the incident said that Kerviel joined SocGen's middle office in 2000, and allegedly became familiar with risk management processes and systems. He moved to the front office in 2005 as a junior trader on Delta One. Significant directional risk in Delta One strategies should be impossible, as directional positions should be hedged.

According to Mission Green, starting in 2005, Mr Kerviel took large directional positions and created fictitious hedges, by buying warrants and securities with deferred start dates and futures with counterparties that did not require instant confirmation. Using his knowledge of the systems – and other employees' access details, SocGen said, he was able to delete trades on the system, fooling monitoring tools into thinking he was within risk limits despite his massive exposures.

Kerviel is pending an appeal into his conviction for fraud, and published a book last year: L'engrenage: Mémoires d’un Trader, alleging that his superiors were complicit in his actions.

On Thursday, UBS announced that it had lost $2 billion in unauthorized dealing activities. Later, the UK's City of London police announced that they had arrested a 31-year old man in relation to the case. By midday, the Financial Times was reporting that the trader was one Kweku Adoboli.

UBS has not confirmed or denied whether Adoboli was the rogue trader in question.

Adoboli's LinkedIn profile shows that he spent more than three years in the bank's technology division, as a trade support analyst, before moving to the bank's Delta One trading desk in September 2006.

If details emerge that the specifics of the UBS incident closely mirror those of Societe Generale, it seems likely we'll see debate reignited over the solidity of risk management systems in investment banks, as well as the wisdom of allowing gamekeepers ( risk managers) the opportunity to become poachers (rogue traders).

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