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UBS: rogue trading is intrinsic to the system

Subeditors on some national newspaper websites should note that busted City Boy Kweku Adoboli is not a ‘rogue trader’ unless and until a court of law finds him guilty of the fraud charges on which he is currently on remand. This blog makes no presumption either way.

But what we do know for sure is that UBS, one of the world’s biggest financial institutions, has this morning confirmed the loss of $2bn on account of unauthorised dealing by one or more of its staff.

Bear in mind here the important moral difference between what is called rogue trading and fraud in the standard sense of the word. The miscreants are not pocketing the proceeds of crime personally; their offence is simply to screw up while doing what their employers put them under enormous pressure to do in the first place.

Basically, traders take bets on which way the market will move. The hope is that they will be right more often than they are wrong, and pocket a large bonus as a result. But markets are unpredictable in nature, and inevitably, sometimes they fluff it.

At this stage, the temptation is to go double or quits with somebody else’s money. Pull it off, and you are applauded for being in possession of balls of steel, and pocket a larger bonus still.

But if – like Nick Leeson or Jérôme Kerviel – you still don’t get a line of three cherries, it is the bank that takes the hit. At the end of the day, the difference between a trading floor superstar and a spell in the slammer is to some extent down to luck.

In effect, a dynamic towards rogue trading is inherent in financial markets as currently constituted, and the system itself encourages promiscuous risk taking. UBS won’t be the last to find that out the hard way.

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