Look closely at traders who are performing significantly above their peers or the market. They have been trading outside of the risk criteria of their employers for a while, most likely. They are making money, so the behavior is tolerated and even rewarded. It’s only when they bet the wrong way on the market and finally lose money that they suddenly become “rogue traders.”
Management will tolerate such risk-taking, as long as the bank makes money. And herein lies danger.
There are two types of risks involved with high-performing traders. There are the risks posed by an employee who moves from a back-office role to a front-office one (e.g., to a trading desk), whereby the person is able to use his or her knowledge of the controls and use them to conduct transactions, undetected.
Former UBS “rogue trader” Kweku Adoboli was such a trader. Allegedly, he conducted fraudulent trading that led to the bank sustaining a £1.5 billion trading loss. He had intimate knowledge of the business’ control environment and went years without being detected by the compliance department and auditors.
It is important to monitor staff that move from a back-office to a client-facing role more closely. Companies might consider changing certain control mechanisms (such as intra-day trading limits, exception reporting rules, etc.) once that person has moved into the new role.
Also, companies should look closely at those employees who end up performing significantly above their peers or the market, for two reasons. First, there stellar performance could be based on inflated sales, hidden losses or fictitious trades. Second, if they are consistently outperforming their peers while staying in compliance with acceptable risk levels, it is important to learn from them; otherwise, management has missed an opportunity to train other staff members.
They key lesson is that our culture will tolerate a certain amount of risk that generates profit, but an organization that waits to monitor the high-performing trader has missed the chance to safeguard its revenues and reputation — and to learn from the successful individual who gets the risk balance just right.