Trading and Fraud: nothing new under the sun

Last Thursday the financial world was surprised by the announcement of a potential fraud by a trader of UBS. Bombshell? Not really, because trading fraud is not anymore surprising given its long list of occurences. Let’s review the list.

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First, let’s mention the question of one of our readers, Arnaud. He is wondering if some financial institutions have neglected some trading activities for the benefit of others.

Frédéric Ponzo : «The algorithmic trading fraud is a myth !»

Frederic Ponzo, founding partner of Greyspark, a London-based consulting firm in strategy, organization and technology on algorithmic trading systems, deconstructs the fears and fantasies associated with risk of algorithmic(...)

It is the finding of an apparent similarity between the trading activities of Jérôme Kerviel (Société Générale’s rogue trader) and Kweku Adoboli: delta one trading (one of basic trading activities) on vanilla and regulated derivatives (not complex at all). He was surprised then to never have seen fraud on complex or exotic instruments. Must we conclude that this is not the complexity of trading that generates a lack of rigorous monitoring of risk but rather a lack of complexity? One could quickly answer yes by reading the interview of Frédéric Ponzo. We could then point out that one of the biggest fraud in history, that of Bernard Madoff, took place on a simple vehicle. Indeed, on one hand his structure was not really a hedge fund and therefore was not considered "complex", and moreover, it was providing a good liquidity (subscription - redemption), proof of use of "simple" instruments, and all this with low management fees!!!

Trading and Internal Fraud

High profile cases of trading fraud and the associated financial losses by rogue traders have highlighted the strategic vulnerability in financial institutions.

Another hypothesis is that the review of monitoring systems and risk management did not occur in all financial institutions. Many firms heaped opprobium on Société Générale in January 2008 without necessarily reviewing their internal procedures or being interested in the new development on the subject. It is insteresting to also re-read the note from Bruno Piers de Raveschoot, "Trading and internal fraud" published on this website in November 2010. We shall particularly point out the phrase "While the potential for large losses is at the core of the problem with this type of activity, the real threat is to the institutions’ ability to establish a system of governance that extends to all aspects of its business strategy"

Yet the list of fraud in financial institutions is getting longer:

How Nick Leeson caused the collapse of Barings Bank

In 1995, the financial markets were shaken by a massive scandal. Barings, one of the most prestigious banks in the United Kingdom is bankrupt following losses caused by Nick Leeson, one of its traders, aged 28(...)

Amaranth and its prominent trader Brian Hunter prosecuted

The CTFC lodged a complaint against the Amaranth hedge fund and its former prominent trader Brian Hunter for attempting to manipulate prices on the natural gas futures market...

Bernard Madoff, swindler of the century

Former chairman of Nasdaq is accused of having set up a fraudulent operation which would have cost its clients, individual investors, pension funds and banks more than 50 billion dollars. The blow could have been fatal to the world of investment(...)

French bank Société Générale victim of exceptional fraud!

Société Générale has declared itself a victim of an unscrupulous trader who concealed a massive loss of 4,9 billion dollars as well as a depreciation of assets linked to sub-primes to a total of 2 billion euros....

_ Top list of trading frauds

Once the light will be shed on the "UBS case", we will know whether it is reasonable to add this event to the table. What worries the most is not so much the occurrence of fraud but more the losses and the trivialization of "billion".

B.N September 2011

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