Business, Legal & Accounting Glossary
A rogue trader is an official employee who makes trades on behalf of the company that are not legal or approved by the company. This term is used to denote the employees who work in the financial trading world and turn rogue due to their own negligence or greed. This term is used for professional traders who make trades while in work which is termed as unapproved financial transactions as per the company.
Banks have created sophisticated Value-at-Risk (VaR) models over the years to manage the trading of instruments — which desks may trade them, when they can trade them, and how much they can trade in a particular period. The limit of a trade, in particular, is carefully defined and maintained, not just to safeguard the bank but also to satisfy regulators. Internal controls, on the other hand, are not completely failsafe. A diligent trader can find a way to work around the system in order to earn large profits.
Frequently, they are caught in improper trades and then forced by regulators to be publicly revealed – to the bank’s disgrace. One has to wonder how many small-time rogue traders are discreetly sacked by a bank because the bank does not want the negative publicity that would result from the news that internal trading procedures were not adequately created or executed.
Nick Leeson, a former derivatives trader at Britain’s Barings Bank’s Singapore headquarters, is one of the most renowned rogue traders in recent years. Leeson suffered significant losses in 1995 as a result of unlawful trading of massive volumes of Nikkei futures and options. Leeson used the Nikkei to take massive derivative positions that leveraged the amount of money at stake in the trades.
Leeson held 20,000 Nikkei futures contracts worth more than $3 billion at one point. The fall in the Nikkei following a big earthquake in Japan produced a broad-based sell-off in the Nikkei within a week accounted for a large portion of the losses. The total loss to the 233-year-old Barings Bank was well over $1 billion, leading to its insolvency. Leeson was accused of fraud and sentenced to several years in prison in Singapore.
More contemporary examples include Bruno Iksil, the “London Whale” at JP Morgan, who racked up $6.2 billion in losses in 2012, and Jerome Kerviel, who was partly or entirely responsible for more than $7 billion in losses at Société Générale in 2007. JP Morgan CEO Jaime Dimon was hesitant to recognise the scale of the “London Whale” losses, initially dismissing the episode as a “tempest in a teapot.” Later, much to his dismay, he was forced to disclose the truth about his bank’s rogue trader.
A rogue trader is a trader who behaves recklessly and without regard for others, frequently to the disadvantage of the institution that employs the trader and maybe clients. Rogue traders often engage in high-risk ventures that can result in massive losses or winnings.
Rogue traders, on the other hand, are only identified as such if they lose, creating incentives that cause moral hazard. If their trades are extremely profitable, no one considers them “rogue,” and they are more likely to win a large bonus – but if their risky bets fail, they are rogue and can cost the firm millions, if not billions, of dollars in losses.
This is an ambiguous region when it comes to the law since the trader is making trades as an employee of the company and cannot be held accountable for doing his work. But the intentions that made the trader enter into those transactions are always open to legal scrutiny, especially if those transactions are without approval from the employee.
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This glossary post was last updated: 6th January, 2022 | 0 Views.