Monday, September 19, 2011
Some comments on the UBS Rogue Trader
There has been lots said about the rogue trader at UBS. The best gag was that the name for a trader who makes money breaching risk limits is "managing director". Matt Taibbi argued that rogue traders were what banks hired when they hired "risk takers".
All of that misses the point. A well organized financial institution - any financial institution - has a back-office and a front-office (and sometimes a "middle office"). The back office records and settles trades and sometimes measures risk. (The risk measurement function is sometimes at the "middle office".) If you have your systems right you can hire "risk takers" all you like. They won't kill you because the "back office" and "middle office" won't let them.
If anyone is able to break the risk limits, managing director, lowly trader, then that is a failure of the system and reflects directly on senior management who have a core function of making sure the systems work.
Oswald Gruebel (the CEO of UBS) took a different stance (hat-tip Kid Dynamite) and argued that management could not stop rogue trading. (Quoted Chicago Tribune.)
All of that misses the point. A well organized financial institution - any financial institution - has a back-office and a front-office (and sometimes a "middle office"). The back office records and settles trades and sometimes measures risk. (The risk measurement function is sometimes at the "middle office".) If you have your systems right you can hire "risk takers" all you like. They won't kill you because the "back office" and "middle office" won't let them.
If anyone is able to break the risk limits, managing director, lowly trader, then that is a failure of the system and reflects directly on senior management who have a core function of making sure the systems work.
Oswald Gruebel (the CEO of UBS) took a different stance (hat-tip Kid Dynamite) and argued that management could not stop rogue trading. (Quoted Chicago Tribune.)
Speaking for the first time since UBS revealed the loss, Gruebel told the Swiss weekly Der Sonntag that the loss couldn’t have been prevented.
“If someone acts with criminal energy, then you can’t do anything. That will always be the case in our business,” the former trader said in the interview published Sunday.READ FULL POST HERE
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