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. If their trades are enormously profitable, no one calls them "rogue." They are more likely to receive a huge bonus.

BREAKING DOWN 'Rogue Trader'

Banks over the years have developed sophisticated Value-at-Risk (VaR) models to control 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. 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.

RELATED TERMS
  1. Nick Leeson

    A former manager with England's Barings Bank, Leeson became a ...
  2. Position Limit

    A position limit is a preset level of ownership, or control, ...
  3. Position Trader

    A position trader is a style of trader who holds a position for ...
  4. Commodity Trader

    A commodity trader focuses on investing in physical substances ...
  5. Day Trader

    A investor who attempts to profit by making rapid trades intraday. ...
  6. Forex Trading Strategy

    A forex trading strategy is a set of analyses that a forex day ...
Related Articles
  1. Trading

    Trading's 6 Biggest Losers

    These "rogue traders" are famous for their billion-dollar mistakes.
  2. Investing

    AMC Shares Up On Acquisition and Ticket Sales

    AMC shares are continuing their recent move higher following the completed acquisition of Carmine Cinemas and strong ticket sales.
  3. Insights

    The World's 10 Most Famous Traders Of All Time

    A review of the most famous and infamous traders in history.
  4. Personal Finance

    A day in the life of a day trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
  5. Trading

    The 10 Worst Mistakes Beginner Traders Make

    Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors, which can result in costly mistakes.
  6. Trading

    How much trading capital do forex traders need?

    Forex traders can see substantial benefits from capital gains in the form of a small pip profit over time.
  7. Trading

    What Can Traders Learn From Investors?

    Discover tips from a long-term strategy that can help you make better short-term trades.
  8. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
  9. Investing

    How To Outperform The Market

    Active trading is an investing style that aims to beat the market. Find out how it works, and whether it will work for you instead of buy-and-hold.
RELATED FAQS
  1. Is there a buy-and-hold strategy in forex, or is the only way to make money by trading?

    Typically there are different ways to trade in most markets. Traders have been classified into three groups, primarily based ... Read Answer >>
  2. How do I place a stop-loss order?

    Learn how to place a stop-loss order and how traders use stop orders to either limit potential losses or to protect part ... Read Answer >>
  3. How do you lose money in the Forex market?

    All trades made in the forex market are made in pairs. In other words, one currency is always quoted against another currency, ... Read Answer >>
  4. How do traders implement the Buy a Bounce Strategy?

    Learn how traders execute the buy a bounce strategy for a security that has reached an important support level. Find out ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center