Before I get to the meat of my article, I want to pose a question: What’s the one thing that all rogue traders have in common?
We’ve all heard of Nick Leeson of Baring Brothers; he lost £600 million in 1995 and was subsequently made famous by his book: Rogue Trader, which was made into a movie. Many people have also heard of Jerome Kerviel — he’s the guy who lost $7.2 billion in 2008 at Société Générale Bank. I read there’s going to be a movie about him and it’s scheduled to come out next year. Jon Corzine has also been in the news recently, he certainly qualifies as a rogue trader.
I define a rogue trader as someone who’s taken unauthorized trading positions or risks. Someone who’s manipulated a market, hidden a loss or partaken in some kind of illegal activity. Quite often, the trader’s original intention was not about “going rogue.” Most incidents begin with a trader taking a loss (or more precisely, not taking a loss), then trying to make that loss back and losing more money. At that point, they’ve arrived at a fork in the road with two possible paths. One path is to come clean and tell their boss or someone at their company about the loss. The second path is to hide the loss and continue to try to make the money back. Naturally, the traders who took the first path never end up in a book called Rogue Traders. These are the traders who took the wrong road, the ones that “went rogue.”
You might think rogue traders should be confined to certain financial markets that are not regulated. An obvious conclusion is to assume that rogue traders are operating in unregulated markets. But that’s not the case. There have been rogue trading events in mortgage-backed securities, U.S. Treasuries, futures, natural gas, stock indexes, metals, energy and even in the LIBOR. You can find rogue traders throughout history and in all of the new financial instruments of the past 30 years.
Joe Jett: 36, American
Firm/title: Kidder Peabody, Head STRIPS trader
Date of rogue trading loss: 1994
Years with firm prior to incident: Four
Market or trading vehicle: U.S. Treasury STRIPS
Amount of loss incurred: $350 million
Trigger/event: GE (Kidder Peabody’s parent company) orders Kidder to reduce their balance sheet for quarter-end. Jett takes off his trades and the company loses money.
Fatal flaw: Assumed he could exploit a flaw in Kidder’s accounting system indefinitely.
Action by company: Fired
Legal or regulatory action: NASD (National Association of Securities Dealers) found Jett not guilty of fraud. SEC found Jett guilty of intent to defraud and fined $8.4 million.
Where is he now: CEO of Jett Capital Management