UK Banks, their shareholders and the tri-partied supervisory regime will be bracing for the possibility that a financial institution within the UK has its own Rogue Trader problem.
The ripple effect of SocGen's problem will be for the risk management teams to get together with the auditors, and ensure that each of the trades made have a genuine closeout. That is, for every buy order closed, there is a genuine seller and vice versa. I think the key to Jérôme Kerviel's deception is that he knew exactly how to bypass the existing systems (he'd worked in the back office after all), or that the 'error' account was getting a workout. Nick Leeson, knocked one spot further down on the Rogue Hall of Fame, was famous for using account number 8888 to bundle his mis-trades into.
That same ripple effect will be onto the size of these accounts, and checking that there has been no collusion between institutions and their clients. One of the favourite methods goes as follows.
Share trading at $5
Trader sells shares to client at $4.50
Client sells shares at $5 for 50c profit.
The profit is split between the two parties, the insider getting it paid into an offshore account.
This can easily be written off as mistakes, oversights, or 'fat-button' trading. As banks start to account and assess their books and the risks that accompany it, who will be the first to write off?
With the UK being home to several multinational banking companies, who operated in much the same markets as SocGen. But if this can happen to SocGen, the undisputed market leader in derivatives trading, it can happen to anyone. Who in the UK will put up their hand first?
To prevent such further occurences, you need only look at the Chinese Walls regulations that prevent information from flowing from its advisory divisions to its proprietary trading desks. Ie, in advising a company that is making a takeover, information should not be passed to the traders.
In this case a new Chinese Wall, perhaps call it a Jérôme Wall in honour of the man of the hour, should be applied by market supervisors and legislators to ensure greater independence between the trading and backroom/settlement. This should assuage the minds of those who are afraid of Trading Loss Risk, by reducing it.
Update: Fat Button Trade
Financial News online has a countdown of some very funny "fat finger" trades. Genuine mistakes, but rather costly. My favourite is rugby related:
Heads up at Bank of America, September 2006
Not so much wrong-fingered as wrong-balled.
A Bank of America trader’s keyboard was set up to execute an order when the senior trader gave the signal – he just had to press enter. However, he failed to notice an errant rugby ball thrown in his direction, which landed on his keyboard and executed the $50m trade ahead of schedule. The ball thrower, a graduate trainee, was given a severe reprimand but no further action was taken.
Another trader said: “Rugby balls are a regular danger on any trading floor so the victim trader ought to have hedged against this possibility.”
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