Guarding the Kraal - On the Trial of the Rogue Trader
The Journal of Corporation Law, Vol. 21, No. 1, 1995
24 Pages Posted: 11 Nov 2010
Date Written: Fall 1995
The securities industry periodically seems to encounter plagues of misconduct. These abuses, while varying in their form and intensity, ultimately result in large losses and lurid headlines in the financial press. Each scandal also eventually manages to arouse the ire of the regulatory authorities. Boiler room operations, hot issues, unregistered "repo" dealers, naked options, insider trading, and penny stock dealers all have had their day in the regulatory sun.
More recently, regulators in the securities industry have been pursuing the "rogue broker." Passing virtually unnoticed, however, was an even more dangerous phenomenon-the "rogue trader." The shroud covering this predator was ripped off abruptly, however, when Barings PLC announced its demise as the result of over $1 billion dollars in losses caused by the futures positions of a twenty-seven-year-old trader in the firm.
The Barings incident was not the first time that a rogue trader left his firm with disastrous losses. There have been a number of such incidents that date back many years, but only rarely have they posed more than isolated threats. The nature of the securities business, however, has changed in recent years as a result of the growth of the institutional trader. Many broker-dealers are dependent on their proprietary traders for a substantial amount of the firm's income. The development of so-called derivative instruments has also increased the leverage available to proprietary traders. Leverage permits greater profits, but it also poses grave dangers to the firm from rogue traders.
This Article describes the increased role of proprietary trading in the securities industry. It identifies the rogue trader and describes some specific instances where rogue traders have caused catastrophic losses to their firms. The Article then focuses on the supervisory requirements imposed by the federal securities laws and other statutory schemes that may be used as mechanisms to control the rogue trader. Flaws in present supervisory structures are also examined. Finally, the Article suggests some minimum supervisory standards that will help guard against the enormous, unexpected losses that can accompany the rogue trader.
Keywords: Securities industry, rogue broker, rogue trader, Barings PLC, derivative instruments, proprietary trading, supervisory standards
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