With the recent scandal in which trader Kweku Adoboli lost 1.3 billion pounds for his employer, the Swiss investment bank UBS, rogue traders have been in the news. A rogue trader is a trader who takes unauthorized investing risks to attempt massive gains, but makes reckless choices in the process. These professionals may work as fund managers, at trading desks or in other capacities where they can invest large amounts of other people's money.

TUTORIAL: Risk and Diversification

Playing by Their Own Rules
What makes these traders "rogue" is their unethical behavior. They may act without the authorization of their companies or supervisors, or exceed the limits they are given. Their investment styles might be more accurately described as speculating, betting or gambling. They may use enormous amounts of leverage or take high-risk positions in derivatives or currencies. Rogue traders often seek huge profits for themselves, but these individuals' professional positions and trading behavior, not their motivations, are what define them as rogue traders.

Rogue traders are usually willing to circumvent government regulations and company rules. These traders might initially be successful and emboldened by their results. They may take larger and larger risks to maintain or improve their track records. Ultimately, their risky bets can cause major losses for the companies they work for and bring criminal charges for fraud, collusion, breach of trust and more. These charges can bring jail time and fines to rogue traders.

Rogue Traders In Recent History
Over the last 20 years, we've seen a handful of major rogue trading scandals. In 1992, Harshad Mehta and other brokers colluded to manipulate the Bombay Stock Exchange. In 1995, Nick Leeson incurred a $1.4-billion loss for Barings bank that brought down the centuries-old institution. Trader Jerome Kerviel incurred a $7-billion loss for French bank Societe Generale, the largest uncovered thus far. Other rogue traders have been caught in Japan, the United States, Australia and the United Kingdom. There may be more rogue traders than we know about. Those who have been successful or who have avoided getting caught in unauthorized or illegal trading activities might be considered investment superstars or be quietly going about their business.

Some rogue traders are infamous not just for their scandalous trading behavior, but for their personal behavior. Stockbroker Jordan Belfort, the "Wolf of Wall Street," was convicted of money laundering and fraud in a relatively small pump-and-dump scheme that lost $200 million, but he is also known for reckless and outlandish acts, including organizing a trading floor midget-throwing contest, using massive quantities of illegal drugs and destroying a yacht and other vehicles. (For more, see How Does A Pump And Dump Scam Work?)

TUTORIAL: Five Minute Investing

A Rogue Trader's Downfall
A sudden, major loss usually triggers a rogue trader's demise. Complex trading strategies can go bad when something unexpected happens in the markets. In Leeson's case, nature intervened. A short straddle he placed on the Nikkei became a huge loss after an earthquake in Kobe.

Rogue traders might also be caught if a co-worker reports their behavior or if regulatory authorities catch on, as happened with Peter Young and an SEC investigation. An exchange may notice a particular trader's behavior or be tipped off, which occurred in the case of Jerome Kerviel and the Eurex derivatives exchange. Adoboli tried to hide his massive losses, but got caught falsifying accounting records.

The Fallout of Rogue Trading
A single rogue trader can bring down an entire company, no matter how well established it is or how successful it has been in the past. A rogue trader's influence can easily extend outside of his or her company. When a rogue trading scandal comes to light, it can cause a major drop in the share price of the bank or investment company associated with the scandal, which happened in September with UBS. Furthermore, a company with a tarnished name may have trouble retaining existing clients and attracting new ones. Top executives can also be forced out of the company for their failure to catch the problem before it exploded, or as part of a company's attempt to regain the public's trust.

The Bottom Line
Losses from rogue trading can be far reaching and extend worldwide. In the aftermath, victims and fearful onlookers may call out for increased government regulation, such as the recent suggestion to ban ETFs, in an attempt to prevent the next fraud. Regulations cannot put a stop to human ingenuity or fallibility. It will only be a matter of time before the next rogue trading scandal emerges. (For additional reading, take a look at Tales From The Trenches: Don't Count On Luck.)

Related Articles
  1. Stock Analysis

    An Introduction To The Indian Stock Market

    Most trading in the Indian stock market occurs through its two exchanges – the Bombay Stock Exchange and the National Stock Exchange.
  2. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  3. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  4. Active Trading

    What Is A Pyramid Scheme?

    The FTC announced it had opened an official investigation of Herbalife, which has been accused of running a pyramid scheme. But what exactly does that mean?
  5. Investing Basics

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  6. Investing Basics

    Quit Your Job To Trade Stocks

    Changes in technology have turned trading into a career field that’s easy to enter. But staying in it is a different story.
  7. Active Trading Fundamentals

    5 Must Watch Films and Documentaries for Day Traders

    Discover these five must-watch films and documentaries for day traders reviewed with the takeaway lessons that inspire, motivate and entertain.
  8. Trading Strategies

    The Traits All Baller Traders Have In Common

    When it comes to traders, these are the traits that separate the wheat from the chaff.
  9. Economics

    3 Notorious American White Collar Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  10. Active Trading Fundamentals

    Playing It Safe With Trades? Or Holding Yourself Back?

    Fear of breaking out of a comfort zone can prevent an investor from reaching his or her full potential.
  1. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
  2. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  3. What is the difference between wash trading and insider trading?

    Wash trading is an illegal trading activity that artificially pumps up trading volume in a stock without the stock ever changing ... Read Full Answer >>
  4. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  5. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  6. How do day traders capture profits from the difference between bid and ask prices?

    Day traders capture profits from the difference between bid and ask prices by scalping stock. Sensing that a stock is going ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center