The Psychology of a Rogue Trader

Submitted by Marco Palmero on 26 October, 2011 - 20:08

The Psychology of a Rogue Trader

There have been quite a few rogue traders who have made the news over the past few years. There's a list of rogue traders below which includes well known names like Nick Leeson and Jerome Kerviel, along with the millions or billions of dollars which they’ve lost their companies as well as their penalties. A rogue trader is a professional traders executing unapproved or ill-advised financial transactions. But why do traders go rogue? What turns a trader to the dark side?

Rogue Trading

These people aren't stupid. To work at a reputable company, handling large transactions it’s probably a reasonable assumption that you must have great qualifications. Perhaps the mistake was that some of the people worked or had experience in the back office, so they knew how to cover their tracks well. So were they simply devious and criminal?

But the thing is, rogue trades aren’t usually premeditated. They didn’t go out of their way to plan a way to defraud their employer by hiding their losses. It just so happened that they had a string of losses, and perhaps felt guilty and then tried to hide the fact.

Think about yourself: unless you are an absolute saint, you would have at one time in your life would have had to confront that you were guilty of some petty crime, be it some “accidental” shoplifting, or hitting a post box, or some graffiti when you were in your teens, or perhaps stealing from one of your friends back in your childhood days. No one was watching, there were no witnesses, you just skipped and hid the fact you did anything. You knew you did wrong, but you were probably too scared about the consequences of your actions. The key word is: scared.

Fear is a key part to trading psychology. The fear of facing the truth. Fear of losing money from a catastrophic loss. The fear of losing money when you didn’t sell on time. Fear of admitting mistakes. Fear rules the psychology of a rogue trader.

List of Rogue Traders

Here is a list of reported rogue traders over the years:

  • Nick Leeson lost £827 million in 1995 leading to the fall of Barings Bank trading Nikkei Index Futures. He was sentenced to 6.5 years in jail.
  • Toshihide Iguchi lost US$1.1 billion in 1995 from Resona Holdings trading US Treasury Bonds resulting in 4 years jail.
  • Yasuo Hamanaka lost $2.6 billion in 1996 working for Sumitomo Corporation trading copper. He was sentenced to 8 years jail.
  • John Rusnak, in 2002, lost $691 million from Allied Irish Banks trading foreign exchange options. He got jailed for 7.5 years.
  • Gianni Gray (16 months jail), David Bullen (3 years and 8 months jail), Vince Ficarra (2 years and 4 months jail) and Luke Duffy (2 years and 5 months jail) collectively lost the National Australia Bank AU$360 million from October 2003 to January 2004 trading foreign exchange options.
  • Chen Jiulin, in 2005, lost $550 million from Jet Oil Futures while he was working for China Aviation Oil. He received 4 years and 3 months jail.
  • Jérôme Kerviel, lost €4.9 billion from Société Générale during 2006-2008 trading European stock index futures. He received a 5 year sentence with 2 years suspended.
  • Boris Picano-Nacci in 2008 lost €751 million from Groupe Caisse d'Epargne trading Equity Derivatives. Not yet sentenced as investigation is in progress.
  • Kweku Adoboli, lost US$2.3 billion this year, while employed by UBS trading S&P 500, DAX, and EuroStoxx index futures. Not yet sentenced as investigation is in progress.