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The Motivations for the Behavior of Rogue Traders

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The Motivations for the Behavior of Rogue Traders The motivations for the behavior of rogue traders Thesis By Zuzana Dančová Submitted in Partial fulfillment Of the Requirements for the degree of Bachelor of Science In Business Administration State University of New York Empire State College 2020 Reader: Tanweer Ali Statutory Declaration / Čestné prohlášení I, Zuzana Dančová, declare that the paper entitled: What are the motivations for the behavior of rogue traders? was written by myself independently, using the sources and information listed in the list of references. I am aware that my work will be published in accordance with § 47b of Act No. 111/1998 Coll., On Higher Education Institutions, as amended, and in accordance with the valid publication guidelines for university graduate theses. Prohlašuji, že jsem tuto práci vypracoval/a samostatně s použitím uvedené literatury a zdrojů informací. Jsem si vědom/a, že moje práce bude zveřejněna v souladu s § 47b zákona č. 111/1998 Sb., o vysokých školách ve znění pozdějších předpisů, a v souladu s platnou Směrnicí o zveřejňování vysokoškolských závěrečných prací. In Prague, 23.4.2020 Zuzana Dančová Acknowledgement I wish to thank all the people whose assistance was a milestone in the completion of this project. I wish to express my sincere appreciation to my mentor, Tanweer Ali, who convincingly guided and encouraged me through the process of completing this project. I also wish to acknowledge my family – my caring parents, great brothers, and my patient partner. They kept me going on and this work would not have been possible without their support. I would like to recognize the invaluable assistance that you all mentioned provided during my study. Contents I. What are the motivations for the behavior of rogue traders? ........................... 6 A. Rogue traders can be a threat ............................................................................ 7 B. Is there a definition of a rogue trader? .............................................................. 8 C. Can theory predict rogue deviant behavior? .................................................. 11 D. Rogue behavior ................................................................................................ 12 E. Does rogue trading appear only occasionally? .............................................. 15 II. Possible explanations/motives ............................................................................. 17 A. Social Behavior ................................................................................................ 18 1. Age .................................................................................................................... 18 2. Isolation and attention seeking........................................................................ 19 3. Disappearance of self-control ......................................................................... 19 B. Control balance theory (CBT)......................................................................... 20 III. Overview of rogue trader’s cases ...................................................................... 24 A. Société Générale and Jérome Kerviel ................................................................ 24 B. UBS and Kweku Adoboli ................................................................................... 26 C. Barings Bank and Nicholas “Nick” Leeson....................................................... 27 IV. Case analyses......................................................................................................... 31 A. Predisposition towards deviance ........................................................................ 32 B. Constraint ............................................................................................................. 33 C. Control ratio ......................................................................................................... 34 D. Opportunity.......................................................................................................... 35 E. Self-control........................................................................................................... 36 V. Conclusion ............................................................................................................... 41 Bibliography ................................................................................................................. 45 Abstract In the financial industry, there have been several situations of huge losses in banks and the responsible person was the one in charge of the money operations, thus rogue trading is a big topic. If we compare some of the scandals, some may seem quite similar. Usually, the people behind the money breaches are men, in their early thirties and with a successful trading pattern behind them. They do not need money and they do not have any psychological problems. Or at least, there was nothing found during investigations. This may lead to the conclusion, that there are visible some patterns that can trigger illegal rogue behavior. This project focuses on the question about what are the motivations for the behavior of rogue traders. The foundation of the theoretical background in this project is the control balance theory. Secondary sources were used to research three of the main rogue trader’s cases. Then the analyses follow from the perspective of the main variables of control balance theory – predisposition towards deviance, constraint, control ratio, opportunity, self- control. The results have shown that several warning signs appear and can be classified as a predisposition towards rogue behavior. Nevertheless, even though behavioral patterns were found, each rogue trader’s case has to be examined individually. Moreover, recommendations for financial institutions are also part of the outcomes of this project. Key words: rogue, trader, behavior, Control Balance Theory, white-collar crime 6 I. What are the motivations for the behavior of rogue traders? An ordinary person who is living a normal life as a trader is one day accused of covering his large losses at the financial institution he works for with fake trades. Even though this may sound strange, there are many stories in history, as well as in recent years, that uncover tremendous losses caused by internal workers who took part in such operations for a certain period of time. Back in 1995, the news was full of headlines informing the public that a young man in his twenties set up a secret account to cover up the huge losses of a branch in Singapore. Nick Leeson was responsible for large operations in this new branch of Barings Bank and suddenly faced an allegation of committing fraud of USD 1.3 billion. Market traders around the world were shocked (Jennings, 2011). Several years later, more cases of such losses appeared. In 2008, Jerome Kerviel faced the consequences of suspicious future trading, resulting in a loss of USD 6.7 billion in Societe Generale Bank. In 2011, Kweku Adoboli was arrested for losing USD 2.3 billion at UBS Corporation (Meek, 2013). How is it possible that such big positions are uncovered? Who are these so-called rogue traders? In my Senior Project Thesis, I will deal with the behavior of rogue traders and I will try to explain possible motives that lead to such behavior. Rogue trading is a popular topic since there have been several situations where banks faced large losses and the person responsible was the one who was responsible for the money operations. If we compare some of the scandals, some may seem quite similar. Usually, the person behind the money breaches are men in their early thirties that have a successful trading pattern. They are not in need of 7 money and they do not have any psychological problems. Or at least, there was nothing found during the investigations. This can lead to the premise that there are some visible patterns that can trigger illegal rogue behavior. In this project, I focus on the motivational factors behind rogue traders’ behavior from an individual’s perspective. I mostly use different secondary sources to research the theoretical framework of this topic as well as several possible points of view on the possible explanations. The control balance theory is briefly applied at the beginning to explain the behavior and it is explained in individual section as it serves as the framework for future analysis. Later, several cases are described with a focus on the unethical methods and signs that could be seen as warning signs to prevent this behavior. Based on the theoretical background described in the first part, mostly done by applying the control balance theory, cases are analyzed with, again, help of secondary sources and the conclusion is drawn from this investigation. A. Rogue traders can be a threat There are sensible reasons for why operational managers fear rogue traders. They often operate alone and have an unrecognizable pattern of behavioral reactions. As a result, they are almost impossible to detect. In recent years, several cases of fraud that were caused by traders were brought to light. Operational managers often have to ask themselves what adds up to make a rogue trader who can cause a fraudulent scandal worth billions of dollars. The word fraud is now related to the so-called fraud diamond. This involves having opportunity, motivation, rationalization, and the skills needed to actually commit fraud. However, why would anyone put themselves at high risk for being caught? The prerequisites for rogue behavior are uncertain, too (Meek, 2013).
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