What Is a Rogue Trader?
A rogue trader is a trader who acts recklessly and independently of others, usually to the detriment of the institution that employs the trader and perhaps clients. Rogue traders typically play with high-risk investments that can produce huge losses or gains.
Rogue traders, though, are only labeled as such if they lose, which generates incentives that create moral hazard. If their trades are enormously profitable, no one calls them "rogue", and in fact they are more likely to receive a huge bonus - but if they're risky bets lose they are rogue and can cost the firm millions or even billions of dollars in losses.
Key Takeaways
- A rogue trader is an employee of a financial firm who engages in unauthorized, often high-risk activities that result in large losses for the firm.
- Rogue traders often try to hide losses after making risky bets since there is a moral hazard situation: if the bet pays off they can earn huge bonuses, if it fails they'll only get fired.
- Famous examples of rogue traders exist, some of which have lost billions of dollars and even brought down otherwise large and stable banks or brokerages.
Rogue Traders Explained
Banks over the years have developed sophisticated Value-at-Risk (VaR) models to control the trading of instruments — which desks can trade them, when they can trade them, and how much in a given period. In particular, the limit of a trade is carefully set and monitored, not only to protect the bank but also to satisfy regulators. Internal controls, however, are not 100% foolproof. A determined trader can find a way to circumvent the system to try to reap outsized gains.
Often they are caught in bad trades and then forced by regulators to be publicly exposed — to the embarrassment of the bank. One has to wonder how many small-time rogue traders are quietly fired by a bank because the bank does not want the negative publicity that comes with news that internal trading controls were not properly developed or implemented.
Examples of Rogue Traders
Among the most notorious rogue traders in recent years is Nick Leeson, a former derivatives trader at the Singapore office of Britain's Barings Bank. In 1995, Leeson incurred heavy losses through the unauthorized trading of large amounts of Nikkei futures and options. Leeson took large derivative positions on the Nikkei that leveraged the amount of money at stake in the trades.
At one point, Leeson had 20,000 futures contracts worth more than $3 billion on the Nikkei. A large chunk of the losses came from the downturn in the Nikkei after a major earthquake in Japan caused a broad-based sell-off in the Nikkei within a week. The total loss to the 233-year-old Barings Bank was well over $1 billion and eventually led to its bankruptcy. Leeson was charged with fraud and served several years in a Singapore prison.
More recent examples include Bruno Iksil, the "London Whale" who racked up $6.2 billion in losses in 2012 at JP Morgan, and Jerome Kerviel, who was partly or wholly responsible for more than $7 billion in losses at Société Générale in 2007. JP Morgan CEO Jaime Dimon was slow to realize the magnitude of the "London Whale" losses, first calling the incident "a tempest in a teapot." Later, to his chagrin, he had to admit the truth about his bank's rogue trader.
FAQs
A rogue trader is a trader who acts recklessly and independently of others, usually to the detriment of the institution that employs the trader and perhaps clients. Rogue traders typically play with high-risk investments that can produce huge losses or gains.
What is an example of a rogue trader? ›
Includes edited transcript. One famous rogue trader is Nick Leeson, whose losses on unauthorized investments in index futures contracts were sufficient to bankrupt his employer Barings Bank in 1995.
What is an example of unauthorized trading? ›
For example, a broker may believe a transaction is in an investor's best interest and, without contacting the investor, make the trade. Or the broker may attempt to convince the investor of a transaction's benefit in the hope the investor ratifies the trade after the fact.
Is rogue trading best described as an example of? ›
Rogue trading is best described as an example of: A. investment risk.
Who is the most famous rogue trader? ›
Nick Leeson
Perhaps the most famous rogue trader of all time. In 1995, Leeson led England's 233-year old Barings bank into bankruptcy with failed bets on Nikkei futures. The $1.3 billion of liabilities he had run up was more than the entire capital and reserves of the bank.
Is rogue trading a crime? ›
Rogue traders are criminals. They appear to be professional tradespeople, using printed leaflets and well kept vehicles, but these are used to con people.
Who is a trader example? ›
Market traders sell goods from a stall in a street market. They might sell fruit, vegetables, clothing, electrical goods, bread, or cheese and processed meats. Somebody who has a stall in a street market and repairs watches or mobile phones is also a market trader.
What is the penalty for unauthorized trading? ›
If an investment professional makes an unauthorized trade, FINRA may fine them between $2,500 and $16,000 and suspend them from between 10 and 30 business days.
Is trading for someone else illegal? ›
You can't trade stock for someone else. That's illegal unless you're an investment professional. There are a lot of legal requirements to manage other people's money. Stocks and investments fall under this rule.
What are the risks of unauthorized trading? ›
The Devastating Consequences of Unauthorized Trading
These losses occur when a trader takes positions in specific security that are too large or too risky, leading to significant market losses. In some cases, traders may engage in unauthorized trading as part of a scheme to defraud the company or investors.
A rogue trader is a trader who acts recklessly and independently of others, usually to the detriment of the institution that employs the trader and perhaps clients. Rogue traders typically play with high-risk investments that can produce huge losses or gains.
What is the cause of rogue trading? ›
Some say the urge to rogue trade is inherent in traders and others says it has to do with hormones, but it appears that no one really knows exactly what the cause is. The truth is that the same qualities and the same qualities that make them successful are exactly what will make them go rogue.
What is a rogue transaction? ›
Meaning of rogue trading in English
the activity of someone at a financial organization losing a large amount of its money in bad or illegal transactions , and trying to hide this: The bank got involved in a $691m rogue trading scandal.
Who is the number 1 trader in the world? ›
1. George Soros. George Soros, often referred to as the «Man Who Broke the Bank of England», is an iconic figure in the world of forex trading.
Are rogue traders pirates? ›
Operating beyond Imperial control, Rogue Traders are a law unto themselves. Some are highly pious individuals, bringing the God-Emperor's light beyond the edges of His rule; others are nothing more than glorified pirates and scoundrels.
Who is the billionaire trader? ›
Rakesh Radheyshyam Jhunjhunwala (5 July 1960 – 14 August 2022) was an Indian billionaire investor, stock trader, and Chartered Accountant. He began investing in 1985 with a capital of ₹5,000, with his first major profit in 1986.
What kind of person is considered a rogue? ›
A dishonest, unprincipled person; a rascal, a scoundrel.
What is the real name of the Rogue Trader? ›
Nick Leeson was born on February 25, 1967 in Hertfordshire, England, UK. He is an actor and writer, known for Rogue Trader (1999), Trial of the Century (2016) and The 11 O'Clock Show (1998).
