Jody Houton
Content Marketing Manager

Ahhhh – the life of a 90’s rogue trader… before the introduction of data-driven compliance solutions that made the unlawful and unauthorized trading of stocks and shares so much more difficult…

This was before the invention of AI and machine learning technology equipped compliance departments with the tools to aggregate and analyze voice- and text-based communications, across hundreds of data streams and multiple languages.

Back then, it was considerably harder to identify compliance breaches, meaning, quite often, rogue traders could continue to commit all manner of financial crime for years on end, before being caught, if at all…

Nowadays, thanks to compliance solutions that automatically flag phone calls, text messages, emails and chat app conversations that make mention of topics such as money laundering, collusion or market manipulation, potential unauthorized transactions and trades can be halted before it’s too late – before the financial fines, irreparable brand damage, executive dismissal or media scandal. And, before a rogue trader becomes immortalized in History’s Hall of Shame.

What is Unauthorized Trading?

Unauthorized trading refers to any transaction/ trade that an investment advisor or brokerage firm makes without the knowledge, permission or authorization from their customer. 

Losing your Barings 

Arguably the most infamous rogue trader of all time was derivatives trader Nick Leeson who became notorious for his part in the bankrupting of the world’s second oldest merchant bank, Barings Bank. 

In January 1995, Englishman Leeson placed a short straddle on the Singapore and Tokyo stock exchanges, betting the Japanese stock market would not move significantly overnight. Unfortunately, as one can never account for nature, when the Kobe earthquake hit the next morning, it resulted in Leeson’s trading positions dropping dramatically. In an attempt to recoup losses he went on to make a series of unhedged, unauthorized trades, which led to losses totaling US$1.4 billion (£827 million). 

After a cat and mouse chase that saw Leeson flee Singapore to Malaysia, Thailand and finally Germany, he was arrested in Frankfurt and extradited to Singapore in November, 1995. He admitted to forging documents and was eventually charged with “deficient internal auditing and risk management practices” but spent just four years in prison. In the year of his release, in 1999, Ewan McGregor and Anna Friel starred in the movie, Rogue Trader, which detailed the incidents leading up to his arrest.

Despite the beginning of the end for Leeson only really starting in 1995, it was later revealed that Leeson had, in fact, been making unauthorized speculative trades since 1992. He had also been regularly using a Barings error account to cover his mistakes and hide his losses. The curious appointment of Leeson as general manager and chief trader at Barings – jobs that are usually held by two different people – also allowed him to hide his losses much easier.

How Do You Eliminate Rogue Trading?

It was so much easier to be a rogue trader back then. Nowadays, if a firm is utilizing the latest in communication monitoring solutions, it is incredibly difficult. Lexicon-based surveillance solutions and relationship mapping technology would have red-flagged much of Leeson’s compliance breaches, such as violations of internal policies and regulatory requirements. 

Whether on the phone, via email, communication app or collaboration tool, suspicious trading activity automatically triggers an alert to rogue traders’ respective compliance teams.

Despite the availability of such technology, studies show that many fines in 2020 were imposed for the same procedural shortcomings that regulators have been highlighting for years, namely: Due diligence on new customers; management of anti-money laundering measures; monitoring of suspicious activity; and ensuring compliance.

Although the problems are clearly the same, the rewards for illegal trading remain just as high as they have ever been. The difference now is that firms can use technology to identify incidents and even intentions of non-compliance — before it’s too late.

It is no longer the 90s. The availability of powerful compliance monitoring tools means that in 2021 and beyond there is no excuse not to take preventative action before one of your traders joins the dubious honour of becoming immortalized in History’s Hall of Shame.

To learn how to implement a robust and modern compliance program, click here.