News broke last week about a 2 Billion dollar loss at UBS resulting from what has been described as Rogue trading (the total is now up to 2.3 Billion). It’s not the first time those words have hit the financial wires – remember Soc Gen’s Jerome Kerviel or Nick Leeson of Baring’s fame? So what really goes on inside the Rogue traders’ head? Why do they do it? Are they greedy? Are they stupid? Or do they think they are so smart that they can get away with hiding billions of dollars in trading losses indefinitely until they make it back? In my opinion, the psychological drive to engage in a rogue-like trading behavior comes down to one simple word – Fear.
Do you want to know how things really work on those trading desks on Wall Street? Here’s the deal. Most rogue trades don’t start out as premeditated, complex plans to defraud a bank or trading firm by hiding losses so let’s not glamorize the situation into something it is not. The truth is, Rogue Trading, while the media has given it a sexy name, isn’t really that interesting or complex.
A trader’s one purpose is to make money, which is why the fear of losing money is what can quickly cause a bad trade to consume a trader and push him to the dark-side, morphing him into what we label a “Rogue Trader.” In the end, if you ask any Rogue trader if they could have done it all over again, would they have just taken the small loss and moved on, I am sure they would say, “Yes.” And not because they eventually got caught but because, as professional traders, they know trading is a marathon, not a sprint.
UBS’s Kweku Adoboli got scared. He made a poor choice. And he tried to hide it.
It really isn’t much different then driving a car and hitting someone at 2:00am on a dark, deserted street, in an unfamiliar town. Your internal dialogue quickly rationalizes it by saying, “It wasn’t my fault, it all happened so fast. I didn’t do it on purpose. I’ve never even been here before.”
You aren’t in any position to think straight but after you see that no one witnessed it, you start to panic and leave the scene. Yes, you know leaving is wrong, but what other choice do you really have? Is it better to keep this a deep, dark secret and live with your guilt for the rest of your life or to call the police on yourself and have to deal with the immediate consequences, which will most likely land you in prison, get you fired from your job and potentially destroy your life. And you still will have to live with the guilty feelings over hitting someone while driving. So what do you do?
Both choices stink but you have to decide now. You can’t wait. You think, “I am too young. I can’t ruin my life over this. I wont let that happen. I made a mistake, but I am good person. I deserve a second chance.” You put the car in gear and drive away, every second knowing you may have made the wrong choice. But in this case, you had two bad choices in front of you and you thought you were making the least bad one of the two.
I understand Wall Street. And more importantly, I understand Trading Psychology and how traders think. Is the decision Kweku Adoboli faced really that much different then the hit-and-run dilemma? Unfortunately, I don’t think so.
He is a 31-year old kid. Facing tremendous pressures day in and day out as a trader at a tier 1 bank on high profile desk. He needs to get it right. He needs to win. And to survive, he needs to do it often.
Kweku is just another scared trader who failed to either have the courage to quickly take responsibility and correct a mistake made by his “fat finger” (aka key-punch error); or perhaps it was a well-intentioned trade, gone bad because of market volatility or quirky fundamentals. It doesn’t really matter how the bad traded started because the point is his mistake was not having the discipline and mental toughness to take the loss immediately and move on.
Basically, he was too scared to call the cops on himself. So he panicked and rather than face the music, he ran and tried to hide the mistake, knowing it is wrong. Then one day, it finally caught up to him because there was no-where left to hide. Amazingly, one small mistake, which had it been immediately revealed, may have caused him to get yelled at by his boss, miss-out on some bonus money at year end or worst case scenario, lose his job; Instead, that one simple fear-driven decision has now cost him his reputation, freedom and for all intensive purposes, possibly his life.
What might surprise many of you is that the seedlings of “rogue trading” occur frequently and daily throughout the financial industry because they just start out as small mistakes. Yes, on a much smaller scale but they are there and frequently just considered to be a normal part of business operations and even viewed as an acceptable loss or “rounding error.” When I was a trader on the floors in Chicago, we called them “out-trades” and they happened daily. In today’s electronic trading environment, mistakes continue to happen because people aren’t perfect.