Rouge Trading: Rogue Trader Nick Leeson

ROGUE TRADING
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Rogue Trading
A rogue trader is an employee who is authorized to trade on behalf of the employer, but makes trades that are not allowed. It usually involves making financial transactions of financial assets that are not approved by professional rogue employees (Weber 2015, p.30). This activity is a violation of the law because the perpetrator has been a rightful employee of the company yet he enters into transactions on behalf of the employer without permission. At several times massive profits and bonuses have been made by employees to their employers from trades that are in the rift with the various legislations. It has been said that the employers turn on the blind eye to such transactions because of many profits involved. One of such example of a rogue trader is Nick Leeson, a famous derivatives broker and a rogue trader who made moves that were speculative, unauthorized and fraudulent that led to the collapse of Barings Bank in 1995. This paper will review rogue trading using Nick lessen case study. It will explain what rogue trading is as well as showing various legal and ethical issues around it.
Rogue traders typically play with investments that have high risks, and that can produce significant losses or gains. They are mostly labeled as a rogue when they lose, but if they make enormous profits, they are likely to receive a huge bonus. Nick Leeson unauthorized investments in index futures contracts led to the bankruptcy of his employers Barings bank in 1995. There have been consecutive financial losses and bankruptcies in different companies a situation that is associated with poor decisions by the senior management of organizations (Dodson 2017, p.15). These people do not surface often, but anytime they get a chance they cause huge losses and bring about embarrassment to the senior management of the organization.
Because rogue trading is a calamity to the industries that offer financial services, senior executives and boards may once in a while ask questions about their organization's use of financial instruments that can have consequences that are explosive if they are not used in the manner that they are intended. The most important thing is to manage the use financial derivatives because behavior that is dysfunctional can undergird already established regulations thus creating “blind spots” in the organization that can as well lead to cleaving to set rules and policies (Shenglin et al. 2018, p.120). The top-down emphasis is on responsible and ethical business. Therefore, any organizations, top of the tone should always be translated into a dynamic sound in the middle and before it can reach the rest of the organization.
The tone of the organizations affects its culture in terms of risk which is the way organizations workers and personnel manage risks. There are various causes of rogue trading — first, deficiencies or flaws in an organization`s risk governance. Every organization should always have a well-formulated framework to keep on check all bad practices that might happen in the entity. These systems and structures should still be up to date and able to see any risk before it happens. If a body lacks such frameworks, then there are high chances that risks can happen. Organization culture on bad practices is another cause. If the senior management of any organization is engaging in the activities that are intended to defraud the company, then there is a high likelihood that the employees are also more willing to deceive the organization as well (Rick & Brink 2015, p.3). Usually, rogue trading is the two-way involving employer and employees. If such a culture is taught in the system of any entity, then chances to suffer risks are very high.
Rogue trading can be controlled and protected in different ways. First is by ensuring adequate internal controls of the organization. This involves segregation of authorization, settlement, and execution of activities, written risk limits, automated exception reporting, criteria on clearly defined counterparties as well as close supervision. All these activities are critical in ensuring that the risk control activities that are established to control vague trading are followed. Effective ongoing monitoring of key controls in both front and back office personnel, as well as oversight by an independent Chief Risk Officer and risk management function, provides various defenses on rogue trading. Also, separate evaluation by internal auditors who are experienced offer an effective way of coming up with rogue traders (Rafeld et al. 2018, p.20)
Separating front/middle/back office processes and activities is another principal to avoiding rogue traders. This involves segregation of duties which ensure traders do not tamper with the reporting and processing of their transactions. Also ensuring integrity in the systems is another way. A good trading system provides all data concerning accounting is consistent and can be easily verified through reconciliations with external parties. Another principle is by using independent, outside pricing sources for the market to the market value of operations. This means that allowing price estimates for the loss and profit calculations to be entered by the staff, opens the door for deception so it should always be avoided. Also limiting access to trading and ensuring that risk control systems are used to separate functional areas ensures that individuals are protected from accessing more than one area.
While dealing with rogue trading in organizations is not easy, management of various organizations should ask themselves the following questions (Leaver & Reader 2019. P.470). Are we using derivatives to speculate on the markets? Do we know the sources of risks and how they affect our operations? Moreover, who is overseeing the use of derivatives in our company?
Examining the lives of the most prominent rogue traders, they possess some common characteristics that could be used by those in charge of financial institutions. First, they have a strong desire to succeed but have poor educational backgrounds. This was the case of Leeson because according to his story, he was a working-class lad from Watford, the son of a plasterer who was chuffed to land a job in the glamorous world of the city of London in 1982. He worked his way up, becoming a whiz-kid in the hardworking atmosphere of the far eastern currency markets (Rafeld et al. 2017, p.280). This indeed shows he had a desire to succeed, but his academic background was less than a stellar. Secondly, they are more interested in being seen a...