UBS trader Kweku Adoboli was arrested on September 14 on charges of fraud and false accounting.
For a trader playing the market, the temptation to "go rogue" is huge. Authorized trading is like a complicated, legal slot machine and requires the assumption of major risk on a regular basis. So, then, how do you fill your company with people who have the confidence to play the market but can also fight the temptation to throw good money after a bad trade?
The latest example of this dilemma comes from UBS trader Kweku Adoboli, who was arrested on September 15 and is now facing charges of fraud and false accounting. UBS (UBS) says he covered up unauthorized trades over the past three months that lost the company $2.3 billion.
This is particularly awkward for UBS as the bank recently overhauled its risk management system. Granted, preventing rogue trading is no easy task, "Nobody who's in this game would be foolish enough to believe that it couldn't happen to them," says David Johnson, managing director in consultancy firm Protiviti's Houston office.
Without knowing the details of UBS' security measures, there are a couple of best practices banks should follow. Companies need to have security systems that flag suspicious trades, and on top of that, managers need to review trading activity. Every year or so, the company needs to do thorough internal audits to see which parts of their business may be vulnerable to unauthorized trading. Companies can even record conversations that traders have from their desk phones.
But beyond operational security, preventing rogue trading is a question of hiring and corporate culture. Managers must create an environment that counteracts the powerful psychological forces that encourage smart traders to make bad decisions that put the company at risk.
First off, the job selects for employees who believe they can beat the market. To be a good trader, you almost have to create a kind of mythology around your ability, says Johnson, "People who are in that business tend to be willing to place large bets, they're very comfortable with that," he says. The environment is high-pressure and competitive.