The Art of Trading: Combining the Science of Technical Analysis with the Art of Reality Based Trading / Bennett Mcdowell
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Chapter 5 Role of Cognitive and Other Influences on Rogue Trader
Chapter 5 Role of Cognitive and Other Influences on Rogue Trader Behaviour: Findings from Case Studies 5.1. Introduction One of the key findings from Chapter 4 was the lack of significant difference in the financial decision-making behaviour of investment professionals compared with retail investors in the survey sample. However, there was a distinctive pattern in the odds ratio in Table 4.5 where investment professionals were seen to be more likely to be affected by behavioural biases when the choices were risky ones. The aim of the discussions and analyses of the selected case studies in this chapter (the qualitative element of the mixed methods approach), therefore, was to investigate the reasons behind the seeming inability or reluctance of investment professionals to ignore the influence of behavioural biases under high risk situations; where their actions could result in either extremely large monetary gains or losses. The discussion in this chapter consisted of three main sections. The first section was a brief account of the events behind five high-profile financial scandals caused by individuals who engaged in unauthorised trading or investment activities on behalf of their financial institutions, or rogue traders as they were popularly known. Section two highlighted some common characteristics of the rogue trading incidents, and section three was an analysis of the behavioural biases and related emotional influences behind the conduct of rogue traders. 132 5.2. Case Studies on Rogue Trading Rogue trading is the term popularly used to describe unauthorised proprietary trading activities by financial market professionals. These trading activities which resulted in significant monetary losses and severe reputational damage to the affected financial institutions more often than not involved transactions in derivative products. -
The Return of the Rogue
THE RETURN OF THE ROGUE Kimberly D. Krawiec∗ The “rogue trader”—a famed figure of the 1990s—recently has returned to prominence due largely to two phenomena. First, recent U.S. mortgage market volatility spilled over into stock, commodity, and derivative markets worldwide, causing large financial institution losses and revealing previously hidden unauthorized positions. Second, the rogue trader has gained importance as banks around the world have focused more attention on operational risk in response to regulatory changes prompted by the Basel II Capital Accord. This Article contends that of the many regulatory options available to the Basel Committee for addressing operational risk it arguably chose the worst: an enforced self- regulatory regime unlikely to substantially alter financial institutions’ ability to successfully manage operational risk. That regime also poses the danger of high costs, a false sense of security, and perverse incentives. Particularly with respect to the low-frequency, high-impact events—including rogue trading—that may be the greatest threat to bank stability and soundness, attempts at enforced self- regulation are unlikely to significantly reduce operational risk, because those financial institutions with the highest operational risk are the least likely to credibly assess that risk and set aside adequate capital under a regime of enforced self-regulation. ∗ Professor of Law, University of North Carolina School of Law. [email protected]. I thank Susan Bisom-Rapp, Lissa Broome, Bill Brown, Steve Choi, Deborah DeMott, Anna Gelpern, Mitu Gulati, Donald Langevoort, Marc Miller, Eric Posner, Steve Schwarcz, Jonathan Wiener, David Zaring, and workshop participants at the University of Arizona James E. -
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. -
How a Rogue Trader Crashed
SPECIAL REPORT Workers assemble a Swiss bank UBS sign at the Marina Bay Street Circuit of the Singapore Formula One Grand Prix September 21, 2011. REUTERS/ TIM CHONG HOW A ROGUE TRADER CRASHED UBS Alleged illegal trades at the Swiss bank have left it bruised and made it more likely that investment banks will face much tougher regulations BY EMMA THOMASSON AND ceiling, and made their way to the gold- For UBS chief Oswald Gruebel -- and EDWARD TAYLOR coloured lifts that whisk guests up to rooms perhaps for UBS as it is currently constituted ZURICH/SINGAPORE, SEPT 27 that overlook the Marina Bay street circuit. -- it was more like the end of the road. The As the bankers sped past works of art by bank’s board had met in Singapore that ATE LAST FRIDAY afternoon, as the likes of Henry Moore, David Hockney afternoon to discuss the loss of $2.3 billion Formula One teams readied their cars and Frank Stella, some made their way by an alleged rogue trader in its London- forL a practice session ahead of the Singapore straight to a lounge UBS had hired to based investment banking arm. Though Grand Prix, the entrance hall of the nearby entertain clients during the race weekend. the board had not yet gone public with the Ritz-Carlton buzzed with activity. At its entrance stood three Singaporean news, it had decided to accept Gruebel’s One by one, senior executives of Swiss women wearing red and white polo shirts, resignation and appoint an interim bank UBS entered the lobby, which is each holding a sign emblazoned with the replacement. -
Analysing the Cases of Nick Leeson, Jérôme Kerviel, and Kweku Adoboli in Light of the Control Balance Theory
Behavioural patterns in rogue trading: Analysing the cases of Nick Leeson, Jérôme Kerviel, and Kweku Adoboli in light of the control balance theory Hagen Rafeld (Vice President, Divisional Control Office, Global Markets Division at a Frankfurt based Financial Institution) Dr. Sebastian Fritz-Morgenthal (Expert Principal, Bain & Company, Inc.) Agenda 1 Introduction p. 3 2 Charles Tittle’s Control Balance Theory (CBT) p. 5 3 The Rogue Traders Leeson, Kerviel, and Adoboli p. 7 4 Applying CBT p. 11 5 Conclusions p. 13 References & Further Reading p. 15 Rafeld & Fritz-Morgenthal Behavioural Patterns in Rogue Trading 2 1 _ Rogue Trading: Historic Overview Rafeld & Fritz-Morgenthal Behavioural Patterns in Rogue Trading 3 1 _ Rogue Trading: Historic Overview (cont.) Source: Hornuf and Haas (2014), Skyrm (2014), and Wexler (2010, p. 6); enriched with own research. Source: Hornuf and Haas (2014), Skyrm (2014), and Wexler (2010); enriched with own research. Global nature & reoccurring phenomenon rogue trading; appearance in various markets and jurisdictions Re-occurring typology/profile: Average rogue trader is male, in its mid-thirties, un- detected for more than 2 and a half years, creates a financial damage of more than $ 1.5bn, and is sentenced to jail for about 5 years Rafeld & Fritz-Morgenthal Behavioural Patterns in Rogue Trading 4 2 _ Tittle’s Control Balance Theory (CBT) Integrated criminological theory, drawing elements from learning, anomie, conflict, social control, labelling, utilitarian, and routine activities theories Equipped with interdisciplinary components, CBT is designed to explain and account for all types of deviant behaviour but also for conforming behaviour (Piquero 2010, p. -
How to Lose Money in Derivatives: Examples from Hedge Funds and Bank Trading Departments Sebastien Lleo William T
How to Lose Money in Derivatives: Examples From Hedge Funds and Bank Trading Departments Sebastien Lleo William T. Ziemba SRC Special Paper No 2 May 2014 ISSN 2055-0375 Abstract What makes futures hedge funds fail? The common ingredient is over betting and not being diversified in some bad scenarios that can lead to disaster. Once troubles arise, it is difficult to take the necessary actions that eliminate the problem. Moreover, many hedge fund operators tend not to make decisions to minimize losses but rather tend to bet more doubling up hoping to exit the problem with a profit. Incentives, including large fees on gains and minimal penalties for losses, push managers into such risky and reckless behavior. We discuss some specific ways losses occur. To illustrate, we discuss the specific cases of Long Term Capital Management, Niederhoffer’s hedge fund, Amaranth and Société Genéralé. In some cases, the failures lead to contagion in other hedge funds and financial institutions. We also list other hedge fund and bank trading failures with brief comments on them. JEL classification: G01, G21, G23, G33 Keywords: hedge fund trading disasters, over betting, Long Term Capital Management, Amarath and Société Genéralé This paper is published as part of the Systemic Risk Centre’s Special Paper Series. The support of the Economic and Social Research Council (ESRC) in funding the SRC is gratefully acknowledged [grant number ES/K002309/1]. Sebastien Lleo is Associate Professor of Finance at NEOMA Business School William T. Ziemba is Alumni Professor (Emeritus) of Financial Modeling and Stochastic Optimization at the Sauder School of Business, University of British Columbia and Research Associate, Systemic Risk Centre, London School of Economics and Political Science Published by Systemic Risk Centre The London School of Economics and Political Science Houghton Street London WC2A 2AE All rights reserved. -
Lessons from Recent UBS Problem Updt1
Lessons from the recent UBS loss of $2B – part 1 By Ramki The rogue trader • Kweku Adoboli • 32 years old • Joined as a trainee five years ago! • Worked three years in a "back office" position as a trade support analyst • Last worked on UBS's "Delta One" desk as director of exchange traded funds in European equities division at UBS, London • IfInforme d his colleagues of the problem • Has taken on the law firm Kingsley Napley (who represented Nick Leeson) • Ten days ago, he had delivered a potential hint at rapidly‐growing losses when he wrote on his Facebook page: "Need a miracle.” • His misdemeanors might stretch back to 2008! The Man Delta trading • Delta trading—the name is derived from the fourth letter of the Greek alphabet—is a gauge of risk exposure for bets made on the movements securities such as stocks and securities • Jérôme Kerviel, the Société Générale trader who was responsible for $6.8 billion in losses in 2008,worked on a Delta Trading desk! Delta trading contd. • Buying a deriv ativ e easi er or less rissyky ttahan buying the asset itself. – Instead of buying bars of gold, a hedge fund manager may buy an exchange‐traded commodities fund, or even a gold fund. • Attractive because they require little upfront capital! • Wall Street firms try to profit from the tiny differences between the values of the derivatives and the underlying assets. Delta trading contd. • In recent years, the desks have generated billions of dollars for Wall Street firms. • Kian Abouhossein, of JPMorgan Chase: – Expected revenue from the business -
Risk Management, March 2012, Issue 24
Canadian Institute of Actuaries Casualty Actuarial Society JOINT RISK MANAGEMENT SECTION Society of Actuaries ISSUE 24 MARCH 2012 EDITOR’s NOTE 3 Letter from the Editors By Ross Bowen and Pierre Tournier CHAIRPERson’s CORNER 4 How Is Your Risk Appetite These Days? By Stuart Wason RISK IDENTIFICATION 5 The Financial Crisis: Why Won’t We Use the F-(raud) Word? By Louise Francis 8 Who Dares Oppose a Boom? By David Merkel RISK QUANTIFICATION 12 Credit Crisis Lessons for Modelers By Parr Schoolman RISK RESPONSE 14 Five Factors That Courts Consider When Deciding Whether to Enforce Limitation of Liability Provisions in Professional Service Agreements By Joshua D. Maggard, Esq. RISK CULTURE AND DISCLOSURES 19 Insurance Companies’ Highly Controlled Use of Derivatives Has Also Resulted in Protection from the Rogue Trader Problem By Ed Toy 28 Perfect Sunrise: A Warning before the Perfect Storm By Max J. Rudolph Issue Number 24 • MARCH 2012` Published by the Joint Risk Management Section Council of Canadian Institute of Actuaries, Casualty Actuarial Society and Society of Actuaries. Canadian Institute of Actuaries 2012 SECTION LEADERSHIP Casualty Actuarial Society JOINT RISK MANAGEMENT SECTION Society of Actuaries Newsletter Editors Ross Bowen e: [email protected] ARTICLES NEEDED FOR RISK MANAGEMENT Pierre Tournier e: [email protected] Officers Your help and participation is needed and Please send an electronic copy of the article to: Stuart F. Wason, FSA,CERA, FCIA, MAAA, welcomed. All articles will include a byline to HONFIA, Chairperson Stephen P. Lowe, FCAS, ASA, CERA, MAAA, give you full credit for your effort. If you would Ross Bowen, FSA, MAAA Vice Chairperson like to submit an article, please contact Ross Allianz Life Insurance Co. -
Derivatives Case.Pdf
Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives INTRODUCTION The 2008–2009 global recession was caused in part by a failure of the financial industry to take appropriate responsibility for its decision to utilize risky and complex financial instruments. Corporate cultures were built on rewards for taking risks rather than rewards for creating value for stakeholders. Unfortunately, most stakeholders, including the public, regulators, and the mass media, do not always understand the nature of the financial risks taken on by banks and other institutions to generate profits. Problems in the subprime mortgage markets sounded the alarm in the 2008–2009 economic downturn. Very simply, the subprime market was created by making loans to people who normally would not qualify based on their credit ratings. The debt from these loans was often repackaged and sold to other financial institutions in order to take it off lenders’ books and reduce their exposure. When the real estate market became overheated, many people were no longer able to make the payments on their variable rate mortgages. When consumers began to default on payments, prices in the housing market dropped and the values of credit default swaps (the repackaged mortgage debt, also known as CDSs) lost significant value. The opposite was supposed to happen. CDSs were sold as a method of insuring against loss. These derivatives, investors were told, would act as an insurance policy to reduce the risk of loss. Unfortunately, losses in the financial industry were so widespread that even the derivative contracts that had been written to cover losses from unpaid subprime mortgages could not be covered by the financial institutions that had written these derivatives contracts. -
Convicted UBS Trader Kweku Adoboli Faces Deportation – Here's Why It's a Huge Mistake
9/4/2018 Convicted UBS trader Kweku Adoboli faces deportation – here's why it's a huge mistake Academic rigour, journalistic flair Convicted UBS trader Kweku Adoboli faces deportation – here’s why it’s a huge mistake September 3, 2018 5.14pm BST Author Isaac Tabner Senior Lecturer in Finance, Director, MSc Finance, University of Stirling Kweku Adoboli was convicted in 2011. Lewis Whyld/PA Archive/PA Images Former UBS trader, Kweku Adoboli was convicted in 2012 for his role in a US$2.3 billion bank fraud. He was released from prison in June 2015, having served four years of a seven-year sentence, but now faces deportation to his native Ghana, despite not living there since the age of four. I believe this is a huge mistake. If the deportation goes ahead, a great opportunity to learn from Adoboli’s mistakes will have been denied to all those involved in delivering resilient and socially useful financial services. Adoboli faces deportation because of a law that requires foreign nationals with convictions of more than four years to be deported to their country of birth. And, although he was at fault, he was also part of a culture of risk taking that led him astray. When we entrust our money to banks we might be forgiven for thinking it will be safe. We ought to be surprised that a vast global institution can be organised in such a way that, according to the law, only one individual should bear personal responsibility and imprisonment for a loss of US$2.3 billion dollars. -
OPERATIONAL LOSSES: LESSONS from SEVEN of the LARGEST ROGUE TRADING EVENTS in HISTORY by Patricio Leonel Morat a Thesis Submitte
OPERATIONAL LOSSES: LESSONS FROM SEVEN OF THE LARGEST ROGUE TRADING EVENTS IN HISTORY by Patricio Leonel Morat A thesis submitted to the faculty of The University of North Carolina at Charlotte in partial fulfillment of the requirements for the degree of Master of Science in Economics Charlotte 2017 Approved by: ______________________________ Dr. Rob Roy McGregor ______________________________ Dr. Craig A. Depken, II ______________________________ Mr. Azhar Iqbal ii ©2017 Patricio Leonel Morat ALL RIGHTS RESERVED iii ABSTRACT PATRICIO LEONEL MORAT. Operational losses: Lessons from seven of the largest rogue trading events in history. (Under the direction of DR. ROB ROY MCGREGOR) Operational risk is the risk of losses arising from the failure of people, processes, and systems, and from external events. A general opinion is that, unlike market risk and credit risk, operational risk is idiosyncratic in the sense that when it manifests in one firm, it does not spread to other firms. This view implies the absence of contagion and that operational risk is firm- specific, not systemic, but there is some new evidence from the Federal Reserve Bank (FRB) that suggests frequencies track both firm and macro variables. Until the emergence of the “Basel 2” reforms to banking supervision in the mid to late 90s, operational risk was largely an afterthought because these uncertainties were difficult to quantify, insure against, and manage in traditional ways. The last 15 years have witnessed the rapid emergence of operational risk from this low status to its institutionalization as a key component of enterprise risk management and global banking regulation. Some authors find it tempting to regard Nick Leeson, the “rogue” trader attributed with the destruction of the legendary Barings bank in 1995, as the true inventor of “operational risk.” The magnitude of loss and the impact of operational risk and losses to date are difficult to ignore. -
Essays on Rogue Traders and Collusive Rogue Trading: Implications of Control Balance, Organizational Misbehaviour, and Behavioural Patterns of Group Dynamics
Essays on rogue traders and collusive rogue trading: Implications of control balance, organizational misbehaviour, and behavioural patterns of group dynamics Doctoral Dissertation TU Dortmund University – Faculty of Business and Economics Hagen Rafeld Bad Vilbel, November 2018 1 Summary When analysing great financial disasters of our time, rogue trading and related pro- tagonists come into play immediately. Recent history reveals a series of rogue traders, jeop- ardizing their employers’ assets and reputation. Rogue trading is a reoccurring phenomenon, gaining immense public attention due to the perceived mismatch between large-scale organi- zations on the one hand and individual employees bringing these organizations into enormous trouble on the other. It furthermore links to the understanding of fraudsters like rogue traders, embedded in (un)ethical organizational corporate corpuses. Throughout this doctoral dissertation, I use three sources of information for the rogue trading case examination: publicly available investigation reports – prepared and issued by regulatory authorities/supervisors as well as authorized delegates like accounting or law firms engaged by the involved banks – published academic research, and news/media information about fines/regulatory sanctions imposed on affected banks and the prosecution status of in- dividuals involved in the events. I apply a case analysis methodology to all rogue traders, extracting and comparing modus operandi, risk management failures and control weaknesses, as well as early warning signals, before I examine the events from a criminological, organiza- tional, and psychological/behavioural sciences perspective. Chapter 1 focusses on Kweku Adoboli at UBS and how he cloned the biggest trading fraud in the history of banking: Jérôme Kerviel’s USD 6.9bn unauthorized trading loss at Société Générale.