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Thread: The Kweku Adoboli Saga

  1. #26

    Default The catch-22 of catching a rogue trader

    The rogue UBS trader arrested last week raises questions about the bank's risk management practices. But the profession is so close to gambling that all traders walk a very fine line.

    By Shelley DuBois, writer-reporter

    For a trader playing the market, the temptation to "go rogue" is huge. Authorized trading is like a complicated, legal slot machine and requires the assumption of major risk on a regular basis. So, then, how do you fill your company with people who have the confidence to play the market but can also fight the temptation to throw good money after a bad trade?

    The latest example of this dilemma comes from UBS trader Kweku Adoboli, who was arrested on September 15 and is now facing charges of fraud and false accounting. UBS (UBS) says he covered up unauthorized trades over the past three months that lost the company $2.3 billion.

    This is particularly awkward for UBS as the bank recently overhauled its risk management system. Granted, preventing rogue trading is no easy task, "Nobody who's in this game would be foolish enough to believe that it couldn't happen to them," says David Johnson, managing director in consultancy firm Protiviti's Houston office.

    Without knowing the details of UBS' security measures, there are a couple of best practices banks should follow. Companies need to have security systems that flag suspicious trades, and on top of that, managers need to review trading activity. Every year or so, the company needs to do thorough internal audits to see which parts of their business may be vulnerable to unauthorized trading. Companies can even record conversations that traders have from their desk phones.
    But beyond operational security, preventing rogue trading is a question of hiring and corporate culture. Managers must create an environment that counteracts the powerful psychological forces that encourage smart traders to make bad decisions that put the company at risk.

    First off, the job selects for employees who believe they can beat the market. To be a good trader, you almost have to create a kind of mythology around your ability, says Johnson, "People who are in that business tend to be willing to place large bets, they're very comfortable with that," he says. The environment is high-pressure and competitive.

    Besides, it's a fair bet that managers do not root out unauthorized trades unless they lose the company money. "You haven't heard of financial scandals where a rogue trader has earned $2 billion extra for the company," says Barry Staw, a professor of leadership and communication at the University of California, Berkeley. Traders who have bet correctly on unauthorized trades are inadvertently rewarded, making the behavior tough to break.

    But perhaps the biggest mental glitch at work is the temptation to make a series of irrational decisions after losing money. Almost everyone falls prey to this phenomenon, according to Staw's research; it's called "escalation of commitment."

    In trading, this means that even though trades are discrete events, it is near impossible for people not to factor a previous loss into their current decisions. The result is that when we want to dig ourselves out of a hole, we make decisions that a third-party observer could clearly identify as bad ones.

    At a certain point, people hit a threshold where irrational choices actually become rational. Say a trader is losing money, and he begins to make riskier and riskier bets. He realizes that his career is in jeopardy and he might even be arrested. The penalty may not change much, for the trader, whether he has lost $1 billion or $2 billion. If that's the case, once he crosses that threshold, it is rational to go double or nothing in an attempt to get out of the hole. Although there's still plenty of money at stake for the company, the trader likely has nothing more to lose at this stage. And people operating in crisis mode tend to look out for their own skin rather than the common good.

    It's still unclear what happened with Adoboli, but in general, it is difficult to reverse this pattern of risky betting once a person feels trapped. One of the best ways to prevent this behavior doesn't rely on security software but rather the culture in an office. Even though traders operate in such a high-pressure environment, they need to feel like they can talk to their managers about problems, insecurities about trades they might have done wrong, and near misses.

    One of the risks of raising the penalty for mistakes is that traders may feel less inclined to come forward with small errors that could be learning opportunities, Staw says. Then the company only sees the huge ones that are too big to hide.

    Investing is so prone to this kind of behavior that employers need to put all systems of checks and balances in place: extremely thorough hiring practices, an open culture of communication, strong technology to catch suspicious trades, and hyper vigilant human oversight.

    As one of David Johnson's clients once told him, "You have to hope that your traders are the finest moral people around. Then, you set up your policies and your rules as if they're all lying, cheating crooks."



    Source: http://management.fortune.cnn.com/20...er/?hpt=ibu_c2

  2. #27
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    Quote Originally Posted by Quaiqu Ananse View Post
    Funny thing is, I still don't blame him or all the other rogue traders that are out there... and trust me there are still lots of them out there... These financial institutions encourage them rewarding them when they make profits and covering up for them when they make losses... Occasionally they'll just make scape goats of a few of them... I blame the system which allows them to do this over and over again... and then gives them back tax payers money to do it all over again.
    I agree with you. I see it as the big fish throwing the small fry under the bus.

  3. #28
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    Default UBS trader "sorry beyond words"

    LONDON (Reuters) - The Quaker Christian school that UBS trader Kweku Adoboli attended as a teenager made quiet periods of reflection a daily part of student life.

    There will have been plenty of time for the Ghanaian to continue the practice since his arrest a week ago on multiple charges of fraud.

    "(Adoboli) is sorry beyond words for what happened," his lawyer Patrick Gibbs told a London court on Thursday.

    "He stands now appalled at the scale of the consequences of his disastrous miscalculations."

    Adoboli, who has been charged with fraud and false accounting dating back to 2008 that UBS says cost it $2.3 billion, had worked at the Swiss bank since 2006, initially in a trade support role.

    His case inevitably has sparked comparisons to that of Societe Generale's Jerome Kerviel, who racked up a $6.7 billion loss in unauthorised deals in 2008.

    Like Kerviel, who also began his investment banking career in a back office role, Adoboli worked with so-called Delta One products, derivatives which closely track the underlying securities and give the holder an easy way to gain exposure to several asset classes.

    According to UBS, the baby-faced 31-year-old concealed "unauthorised speculative trading in various S&P 500, DAX, and EuroStoxx index futures" by creating fictitious hedging positions in internal systems.
    Beware lest you lose the substance by grasping at the shadow. ~Aesop

    Ignorance can be educated,drunkenness sobered,craziness medicated but there is no cure for STUPIDITY


  4. #29

    Default The growing threat of rogue trading

    The dangers inherent in the world of securities and derivatives trading have risen dramatically. This new threat is a result of the advent of high-frequency, ‘black box’ trading strategies, and fully automated, low latency exchange markets. In the past, traders would exceed limits, and finding prices moving against them, extend their unauthorised positions. The build-up of risk and losses would force the individual to cover up and misrepresent activities. Such hidden positions, when brought to light, have toppled banks, and led to resignations of senior executives with otherwise stellar records. In the future, banks, or worse — clearing houses — could be brought down by high-frequency trading software building massive positions in unforeseen and difficult to predict ways.

    The future black box rogue trading scandal will have much in common with prior rogue trader scandals. The actions of those individuals dubbed ‘rogue traders’ have fascinated and, to an extent, invoked a degree of awe and admiration from those not directly affected by their machinations. These individuals circumvented controls, exceeded limits, and carried on by misrepresenting their holdings and risk.

    Traders ordinarily buy and sell financial instruments with the goal of making profits each time they trade them. Those who are good at what they do can bring the firms for which they work enormous profits — and, in turn, earn large salaries and bonuses. But there are risks involved and traders can also end up on the loss side of the equation.

    Unfortunately, in the high-stakes, high-risk, high-tension world in which traders find themselves, the drive for success can overcome ethics. These individuals cover losses and deceive their colleagues, often in clever and ingenious ways. The result is the so-called rogue trader: people like Jérôme Kerviel at Société Générale and Nick Leeson of Barings Bank, who managed to hide their losses over extended periods by stealth and misrepresentation until their houses of cards tumbled and the spectacular frauds they perpetrated came to light.
    With just these two rogue traders, the money involved is almost incomprehensible: Kerviel’s actions (revealed in 2008) cost Société Générale, France’s second biggest bank, some $7.1 billion. Leeson, who brought down the 233-yearold Barings Bank almost a decade earlier, did so at a cost to the bank of about a third of that amount.

    Interestingly enough, instead of invoking public scorn and rage, Kerviel was looked upon by some as a hero because he (to his fans) outwitted fat-cat bankers. Leeson was seen as the inevitable result of blue-blooded bankers unprepared for the new, rough and- tumble world of global finance. The very use of the word rogue (which has long been synonymous with words such as scamp, scoundrel or rascal) raises a number of interesting questions when it’s paired with trader. Why do these individuals receive jail sentences well under ten years for their deeds? After all, many bank robbers — notably those who use just a note asking for money, are unarmed and on average make off with $4,000 — tend to receive sentences that are double that. Is it the very daring of these traders, their seeming success at fooling so many people in charge of these institutions, that attracts wide public attraction (and perhaps admiration)? Why do rogue traders have movies made about their crimes, sign enriching book deals and go on to successfully reinvent themselves once they are released from their comparatively short prison terms?

    A closer look at rogue traders
    Examining the lives of the most prominent of the rogue traders reveals some common characteristics that could be used by those in charge of financial institutions to flag individuals whose actions may warrant closer supervision.

    •They tend to have less than stellar credentials or educational backgrounds, but a strong drive to succeed. This would serve as a good description of Nick Leeson, who according to the BBC, was “a working class lad from Watford, the son of a plasterer, [who] was chuffed to land a job in the purportedly glamorous world of the City of London in 1982…. It was a relatively low-grade job, but he quickly made a name for himself. He worked his way up, becoming a whiz-kid in the hardworking atmosphere of the far-eastern currency markets.” Kerviel was described by The Economist as ‘a country bumpkin from Brittany’. Yet, he was a country bumpkin with an appetite to trade billions although his remit required him to fully hedge his positions.
    •They are more interested in being seen as heavy hitters or successful traders among their peers than they aspire to accumulate massive wealth. Leeson, interviewed by the BBC about the actions of Kerviel, explained, “Probably his biggest fear was the fear of failure, as was mine…. Everything gets caught up in the success story around you.” Moreover, the investigations quickly showed that Leeson and Kerviel made no personal profits from rogue trading.
    •They seem to be especially good at winning the confidence of those above and below them in their firms’ hierarchies. Influence and ‘star status’ gives them the latitude and permission to circumvent standard practices and be granted exceptions. For example, according to The New York Times, John Rusnak of Allfirst Financial of Baltimore, a subsidiary of Allied Irish, who in 2002 was exposed for hiding losses of $691 million over five years, was allowed to ‘trade during his vacations, which is against banking guidelines because scams are often discovered during a break in trading’ when colleagues spot discrepancies.
    •They have an above-average understanding of the back-office systems for mundane tasks like trade confirmations and margining, knowledge that allows them to manipulate data to cover their tracks. According to the BBC, “Société Générale alleges the trader [Kerviel] used in-depth knowledge of the control procedures gained while working in the bank’s middle office in his former job.

    How they do it
    After the blow-up, it usually turns out that rogue traders have exploited multiple weaknesses in their firms’ procedures and systems. Keep in mind as well, that in most cases, investigations reveal that any number of managers were aware of profits (which later, of course, turn out to be fictitious), and therefore that risks were being taken. The performance culture of banks however, pressurises senior management to turn a somewhat blind eye to what is going on. The hope is that the results will enhance bonuses and promotion opportunities. It is notable that these events occur rarely in firms (e.g., ‘bulge bracket players’) that are regarded as having stronger managements, teamwork cultures and more tightly controlled market operations. Top banks avoid giving any individual broad authority to make both trades and entries into back-office systems. Joseph Jett at Kidder Peabody in 1993 was an unusual case, since he worked for a leading Wall Street firm at the time; however, the firm’s own systems were miscalculating profits for fixed-income positions. Jett merely made trades that Kidder’s own systems said were profitable, when in fact they were not.

    ‘Joseph Jett was head of government bond trading at Kidder Peabody when in 1993, he was abruptly fired — and blamed for generating losses that resulted in a $210 million write-off for Kidder’s parent, General Electric. Both the Securities & Exchange Commission and the National Association of Securities Dealers rejected Kidder’s charges that Jett had engaged in fraud. But the SEC charged him with book- and record-keeping violations as well as intent to commit fraud and ordered him to disgorge $8.2 million in alleged false profits.’ Leeson and Rusnak, on the other hand, overrode standard procedures by allowing large trading positions to be built up without adequate counterparty confirmations. They both were able to manipulate risk management reports to convey the false impressions that any losing positions were hedged by profitable ones (Rusnak), or that the losing positions belonged to customers (Leeson). They also were able to limit or prevent any external pricing validation (mark-to-market) of their positions to take place.

    An ounce of prevention
    The major rogue trading cases were all avoidable through basic, general management. There are a few immutable principles in the control of trading operations, but management must enforce them rigorously and continuously with no exceptions. The four core principles for avoiding rogue trading disasters are as follows.

    1.Separating front/middle/back office activities and processes — Segregation of duties ensures traders cannot interfere with the processing and reporting of their transactions
    2.Limiting access to trading, risk control and settlement systems to separate functional areas completely and preventing any individual from having access to more than one area
    3.Using independent, outside pricing sources for mark-to-market valuing of positions — it’s easy to value a bank’s position in IBM shares, but many traded instruments do not have an easily obtained market price. Allowing internal staff to enter price estimates for profit and loss calculations opens the firm to deception
    4.Ensuring integrity, which is the key to a good trading system — this means all trade accounting data are accurate and consistent, and can be verified easily through reconciliation with external parties (e.g., client trade confirmations, clearing)
    In sum, firms must maintain a robust control environment, allow for audits, limit access to key functions to specified users, and be able to reconcile with other internal and external data.

    Rogues to the nth power
    Until recently, traders who hid risks day after day were the main concern. Paper trade tickets stuffed in a drawer or error accounts were the means rogue traders used to cover their losses. Today, sophisticated market technology allows orders to be placed and trades to be made with mere milliseconds of delay. Have banks’ internal controls been adapted and made tougher to handle this new environment? ‘Fat-finger’ errors from misentry of data or an extra digit added to the quantity field remain common, and are difficult to prevent. While leading firms have strong controls capable of detecting and closing off trading activities that exceed limits, I fear other firms active in today’s markets could find their software building large loss-making positions in unforeseen ways and without real-time detection. The rising concern today is about traders developing black box programs or algorithms that run amok or ‘go rogue’ when triggered by certain conditions. The speed and volumes in today’s markets mean ‘algos’ can do their damage in an extraordinarily short period of time. In the past, forged paperwork was often behind trading frauds; but this is less of a risk in today’s computerised age, when high-frequency traders are dominating the equity market. According to the Financial Times, these traders now generate more than 60 per cent of the volume of trades because they are capable, collectively, of executing billions of shares a day. Moreover, it also notes that, according to regulators, “it is unclear who is monitoring traders to ensure they do not take undue risks with their algorithms.” Other unanswered questions include:

    •Are banks running ‘stress tests’ on their high frequency trading programs?
    •Could errors in price feeds from the many sources of market data trigger a flood of trades before the aberration is detected?
    •Could detailed knowledge of a large bank’s algo trading rules be exploited by an external trader who sets off the market conditions that lead the algo to ‘misbehave’ or ‘go rogue’?
    •Are regulatory cross-market ‘circuit breakers’ and trading halts required, or can natural price discovery be retained in today’s low-latency markets?
    Concern about the role of these algorithms skyrocketed after the so-called ‘flash crash’ of 6 May 2010 that caused the Dow Jones Industrial Average to plunge nearly 1,000 points in less than a half hour, with nearly a trillion dollars in stock market value evaporating — and then (mysteriously) reappearing. When it was later discovered that 68 per cent of the questionable trades that ended up being cancelled involved Exchange-Traded Funds (ETFs), whose trading is highly computerised, the US regulators decided to explore whether algorithms that cause disruption in markets should be treated as if they were rogue traders.

    Regulators are eager to develop methods for assigning responsibility when trading technology goes awry. Overall, the computerisation of financial markets has improved transparency and efficiency, and reduced investors’ costs. To avoid politically-motivated bans on new trading technologies, leaders in the financial markets industry must define when high-frequency or algorithmic trading crosses the line into being disruptive to markets, and who is responsible when it happens. Finding the answers to these concerns is now perhaps the most critical element in ensuring the safety of financial systems in the future.



    Source: http://bsr.london.edu/blog/post-50/index.html

  5. #30
    Super Moderator Pope Bitterz D'Alomo's Avatar
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    Regulators are eager to develop methods for assigning responsibility when trading technology goes awry.
    Eager indeed...laughable !
    Beware lest you lose the substance by grasping at the shadow. ~Aesop

    Ignorance can be educated,drunkenness sobered,craziness medicated but there is no cure for STUPIDITY


  6. #31
    Super Moderator Pope Bitterz D'Alomo's Avatar
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    Default Kweku Adoboli pleads not guilty

    31-year-old City trader has pleaded not guilty to four counts of fraud and false accounting while working for the Swiss bank UBS at Southwark crown court.

    Kweku Adoboli, of east London, appeared at Southwark crown court to deny the charges. They relate to Britain's biggest banking fraud, which cost UBS almost £1.5bn.

    Adoboli, the former senior trader on the bank's global synthetic equities desk, spoke only to confirm his name, plead not guilty to the charges and thank Judge Alistair McCreath when he remanded him in custody to face trial on 3 September. The trial is expected to last for around six weeks.

    A packed court heard that between 1 October 2008 and 1 June 2011, Adoboli was accused of fraud and was told he "dishonestly abused his position to gain for yourself".

    He was also accused of false accounting by falsifying records of transactions for UBS over the same period. Between May and September last year, he was accused of false accounting of exchange traded funds and "fraud by abuse of position".

    Adoboli took notes throughout the brief hearing, which lasted for around 20 minutes.

    The judge told him: "Kweku Adoboli, I remand you in custody. I or some other judge will hear any application for bail as and when it is made. Your trial will be on 3 September. There will be a case management hearing on 9 April."
    Beware lest you lose the substance by grasping at the shadow. ~Aesop

    Ignorance can be educated,drunkenness sobered,craziness medicated but there is no cure for STUPIDITY


  7. #32
    Godfather Fashion Yaa's Avatar
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    So sad. Anyone know how many years he'll serve


    all go to the same place ;all come from dust and to the dust all return. who knows if the human spirit rises upward and if the spirit of the animal goes down into the earth?
    ecclesiastes 3:20-21 :-x

  8. #33
    Super Moderator Pope Bitterz D'Alomo's Avatar
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    Quote Originally Posted by Fashion Yaa View Post
    So sad. Anyone know how many years he'll serve
    minimum of 15yrs let's wait and see how good his attorney is.
    Last edited by Pope Bitterz D'Alomo; 30th January 2012 at 11:46 PM.
    Beware lest you lose the substance by grasping at the shadow. ~Aesop

    Ignorance can be educated,drunkenness sobered,craziness medicated but there is no cure for STUPIDITY


  9. #34

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    thanks for the update...
    but it still pisses me off to no end that he's being used as a scape goat...

  10. #35
    Godfather Fashion Yaa's Avatar
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    Quote Originally Posted by Pope Bitterz D'Alomo View Post
    minimum of 15yrs let's wait and see how good his attorney is.
    thank you Pope ......we can always coint on u with 411


    all go to the same place ;all come from dust and to the dust all return. who knows if the human spirit rises upward and if the spirit of the animal goes down into the earth?
    ecclesiastes 3:20-21 :-x

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