When Traders Go Rogue: How to Stop Them Before They Start



  • When traders succeed with risky transactions, managers may both reward the behavior and be less inclined to ask questions.
  • Traders often have personality profiles that are drawn to risk and excitement.
  • Ethics and compliance programs, backed by the CEO, can help prevent misconduct like rogue trading.

In politics and life, there’s a certain charm to “going rogue.” It evokes images of fictional rascals like Jack Bauer or Captain Jack Sparrow. In the world of banking and investments, though, it’s a phrase that sends chills up a CEO’s spine. 

In September, the Swiss bank UBS learned it lost $2.3 billion due to the missteps of a rogue trader. Rising star Kweku Adoboli was authorized to trade in stock index funds. But he had exceeded the firm’s risk limits and covered his tracks by entering fictitious trades on the books. The bank survived, but its CEO did not. 

It was hardly an isolated case. Three years ago, rogue traders caused losses of $2.7 billion at Credit Suisse. That same year, 2008, Jérôme Kerviel racked up $6.7 billion in red ink at the French bank Société Générale. The Wall Street Journal counts at least 11 such instances since 1995, including an earlier scandal at UBS.

How do traders go rogue with such regularity, and what takes them so long to get caught? The answer, say two professors at the McCombs School of Business, is often rogue management. Dishonest traders emerge when managers encourage them to take chances, then look the other way as they cut ethical corners.

“It’s a failure of corporate culture,” says Management Professor Janet Dukerich. “These people are very successful in terms of turning a profit for the company — so much so that people stop asking the questions about how they’re getting these wondrous outcomes.”

It's All in Their Heads

The problem starts with the psychological profiles of many traders, says Robert Prentice, professor in the Department of Business, Government, and Society. “They’ve got a chance to make a lot of money, with other people’s money. It attracts people who like money, excitement, and risk.”

He cites a new study from Switzerland’s University of St. Gallen, in which 27 professional traders took the same behavioral tests as 24 psychopaths from local prisons. The traders scored higher than the psychopaths in qualities like egotism and willingness to take risks.

Those traits can flourish on trading floors. Higher risks carry the promise of bigger rewards, and financial firms lavish rewards on their top producers. The year before Kerviel was busted, he earned a bonus of $416,000.

Loose Rules

Besides cash, superstars often earn a degree of independence from internal controls. Nick Leeson, a rogue trader at the British bank Barings in the 1990s, was able to conceal his losses because he was allowed to settle his own trades, a job normally done by a second person. 

“When things are going well, they don’t want those internal controls enforced very well, because they’re not going to make as much money,” says Prentice. “You end up with a sort of trading culture that undermines the formal rules.”

The bigger the gap between a company’s formal and informal culture, the more potential for fraud, says Dukerich. “When they’re misaligned, people listen to the informal culture: what’s regularly rewarded, the stories that permeate the organization. If people see other people engaging in questionable acts and then touted as success stores, it sends a message of, ‘This is how I should act in order to get ahead in this organization.’”

The Snowball Effect

But staying ahead can turn into a trap once rogue trades start going bad. In Leeson’s case, he tried to recover from a loss of $30,000 by placing bigger and bigger bets, hiding them from his superiors. Ultimately, he lost $1.3 billion and put the bank out of business.

“Nobody wants to admit they had a loss when they’re a Master of the Universe,” says Prentice. “You have a small loss, and you’ve got to find a way to make it up. You double down and double down. The next thing you know, you’re down $3 or $4 billion.”

Where There's a Will...

It doesn’t have to be that way, says Dukerich. Firms can effectively discourage rogue trading, if management has the will to do so. 

The first step is to have an ethics and compliance program and an officer whose job is to oversee it, says Dukerich. In companies with such programs, 76 percent of workers felt comfortable reporting misconduct to their legal departments, according to a 2008 survey of 5,065 corporate employees by management consulting firm KPMG. In companies without such programs, only 25 percent felt comfortable.

The next step is a commitment from the CEO. “It’s not enough to have an ethics and compliance program put in place,” she says. “Employees have to believe that from the very top, integrity and moral character are equally as important as maintaining profit.” 

While ethics start at the top, every employee at every level needs to feel accountable, she adds. “It means that if I see something that’s morally or legally questionable, I need to bring this up. I need to bring it up to a supervisor, or if that’s not sufficient, to a hotline or an ombudsman in this organization.”

Workers also need to trust that someone will listen if they blow a whistle. In firms with programs, KPMG found that 86 percent of employees believed reporting misconduct  would lead to appropriate action, compared to 41 percent at other firms. At firms with programs, 77 percent believed they would be protected from retaliation.

Catching rogue trading depends less on elaborate accounting systems than on the workers themselves, Dukerich says. “You’ll never be able to monitor every person’s behavior at all points in time. You want to create situations such that people take personal responsibility when they see something questionable.”

Prentice agrees. “Companies can tamp this down. From the day traders walk on the floor, they need to be told about the limits. Though it’s against all human nature, they’ve got to get managers to enforce the limits they’ve put into place.

“Like insider trading, I believe we’re never going to stop this phenomenon. But it’s so expensive and puts so many firms out of business, that we’ve got to keep trying,” Prentice adds.


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Faculty in this Article

Janet Dukerich

Professor of Management McCombs School of Business

Janet Dukerich, the Harkins & Company Centennial Chair in Management, received her B.S. and M.A. from Ohio State University and her Ph.D. from...

Janet Dukerich teaches in the Texas Executive Education program, featuring open enrollment, custom and certificate classes for executives and organization teams.

Robert Prentice

Professor, Business Law

Robert A. Prentice is chair of the Department of Business, Government and...

About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...


#1 good post, added you to my

good post, added you to my RSS reader.

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