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UBS Rogue Trader Loses $2 Billion In Unauthorized Trades

timothy posted about 3 years ago | from the let's-give-it-to-a-nice-fiscally-responsible-government dept.

The Almighty Buck 360

PolygamousRanchKid writes with this snippet from Reuters that sounds like a ready-made movie script: "Switzerland's UBS said on Thursday it had discovered unauthorized trading by a trader in its investment bank had caused a loss of some $2 billion. 'The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion,' the bank said in a brief statement just before the stock market opened." Asks the RanchKid: "I wonder how this will reopen the debate about the role of computer systems in the trading and the safeguards that are supposed to protect against these risks. But if microseconds mean millions in trading ... who has time for checks?"

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Digital money (0)

Anonymous Coward | about 3 years ago | (#37411526)

Gone at the flip of a switch.

Re:Digital money (2)

Jeremiah Cornelius (137) | about 3 years ago | (#37411952)

So. What I want to know is...

Who has this 4 Billion now?

I invoke Teslacle's Deviant to Fudd's Law: "It Comes In, It Must Go Out"

If no one GOT this money? It never existed. Like the money I 'lose" when my stock-options lose value.

If someone - or many someones - GOT this money, then there's the possibility of collusion to be investigated.

I think this little fish is sombody's patsy. But who remembers Barings Bank and Nick Leeson?

Re:Digital money (1)

DynamoJoe (879038) | about 3 years ago | (#37412484)

I really misread the name of that law.

Poor Elmer Fudd's got deviant testicles.

Re:Digital money (4, Interesting)

infodragon (38608) | about 3 years ago | (#37412276)

This was a trader, not HFT. He was manually calling in trades, either through a computerized system or through UBS's trading desk. The money was lost over a period of time in which he was probably exploiting loopholes in the controls of UBS. It's really disturbing seeing the trend against HFT when there is no evidence to show how it's being perceived. The flash crash last year was not caused to to HFT but due to a fund selling $4.1bn in E-Mini S&P futures.

From Wikipedia...

http://en.wikipedia.org/wiki/2010_Flash_Crash [wikipedia.org]

The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral,"[10] and detailed how a large mutual fund firm selling an unusually large number of E-Mini S&P 500 contracts first exhausted available buyers, and then how high-frequency traders (HFT) started aggressively selling, accelerating the effect of the mutual fund's selling and contributing to the sharp price declines that day.

Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.

"a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position."

--- end quoting

I just roll my eyes... "portrayed a market so fragmented and fragile that a single large trade could..." It was a sell order for $4.1bn let me type that out... $4,100,000,000. Anybody have any idea what that does to available liquidity? No time in the history of the US markets could they have withstood this type of hit. HFTs provided liquidity during that time, higher spreads but without the HFTs the bottom would have fallen out. The drop would have been MUCH MUCH worse.

Right now HFTs are the target of a smear campaign by the SEC, it's a scapegoat. HFTs almost uniformly lost their butts that day. Read between the lines and stop drinking the Kool-Aid.

Two more things I'll hold your hands on... a large FUNDAMENTAL trader, this means somebody who trades on fundamentals not technical analysis, which is critical to HFT, initiated a trade for 75K contracts. HFTs passed that around for a volume of 27K almost 1/3 of that... So if you try to take the worst slant on that they provided liquidity to 1/3 of the order that started this. hmmm... what if HFTs weren't trading that day... others would have had to absorb over 33% of that hit. The result, Armageddon!

Sometimes I don't know why I try... I guess the Kool-Aid is too tempting.

FIRED ?? (0)

Anonymous Coward | about 3 years ago | (#37411532)

Will he or won't he be ??

Re:FIRED ?? (1)

ge7 (2194648) | about 3 years ago | (#37411570)

A guy who makes losses like that is a huge asset to any company. All you need to do is send him working to a competitor and watch as they burn down.

Re:FIRED ?? (4, Funny)

0racle (667029) | about 3 years ago | (#37411794)

At a competitor? Hell, this man is CEO material. You can't let assets like that get away.

Re:FIRED ?? (2)

DynamoJoe (879038) | about 3 years ago | (#37412500)

Meh. He's nothing special. We've got a congress full of people like this.

Re:FIRED ?? (1)

Wyatt Earp (1029) | about 3 years ago | (#37411660)

Since he got arrested at 3am local time, I don't think he's going to have a job much longer.

Re:FIRED ?? (0)

Anonymous Coward | about 3 years ago | (#37411670)

Might just go somewhere else, like Steve Perkins did. Guy got drunk and blew half a billion, then was given a job somewhere else for it. Good ol' financial industry.

Nah, wont happen like Steve Perkins. (1)

140Mandak262Jamuna (970587) | about 3 years ago | (#37411732)

You see this guy is black. Which means he won't be treated well by the good old boys network.

Re:Nah, wont happen like Steve Perkins. (0)

Anonymous Coward | about 3 years ago | (#37412008)

I read his name and I thought 419?

Re:Nah, wont happen like Steve Perkins. (1)

Savantissimo (893682) | about 3 years ago | (#37412618)

His name is Kweku Adoboli. "Kweku" seems to be a Ghanian name meaning "born on a Wednesday".
(Updated verse: "Wednesday's child is full of WHOA")

Re:FIRED ?? (1)

Andrewkov (140579) | about 3 years ago | (#37411790)

He got a promotion. He learned what not to do, you can't buy that kind of experience.

Re:FIRED ?? (2)

Jeremiah Cornelius (137) | about 3 years ago | (#37411976)

"you can't buy that kind of experience."

Yes you can. For a mere $2 Billion, USD. :-)

makes me wonder who earned $2 Billion (1)

desertfool (21262) | about 3 years ago | (#37411584)

Who came out on top on this trade? Or was is spread amongst many?

Re:makes me wonder who earned $2 Billion (0)

Anonymous Coward | about 3 years ago | (#37411644)

Who came out on top on this trade? Or was is spread amongst many?

Looks like CmdrTaco's retirement plan worked.

Re:makes me wonder who earned $2 Billion (2)

nine-times (778537) | about 3 years ago | (#37411656)

The stock market is not a zero-sum game.

Re:makes me wonder who earned $2 Billion (1)

Pharmboy (216950) | about 3 years ago | (#37411728)

No, but you can "lose" money in order for someone else to "gain" it, in a laundering fashion. There is more to the market than buying and selling stock.

Re:makes me wonder who earned $2 Billion (0)

Anonymous Coward | about 3 years ago | (#37412098)

Sure it is.

You can't buy without someone selling, likewise you can't sell without someone buying, ULTIMATELY - what I mean is whatever you do, short sell, go long, etc. eventually your loss goes to the pocket of >= 1 entities. Likewise, your winnings come from >= 1 entities.

Think of the mechanics and you'll see it is a zero-sum game.

Why the market is expanding/contracting is due to other reasons, e.g. FED printing US lollars which flow to the stock market, savings from elsewhere entering the market, equity being liquidated and disappearing from the market and so on.

Re:makes me wonder who earned $2 Billion (1)

tomhudson (43916) | about 3 years ago | (#37412104)

The stock market is not a zero-sum game.

Ultimately, it is, because ultimately, every trade has a winner and a loser, and ultimately, the value of every stock goes to zero. We just haven't seen the game played out long enough yet (though we came pretty close recently).

Re:makes me wonder who earned $2 Billion (4, Insightful)

xelah (176252) | about 3 years ago | (#37412370)

The stock market is not a zero-sum game.

Ultimately, it is, because ultimately, every trade has a winner and a loser, and ultimately, the value of every stock goes to zero. We just haven't seen the game played out long enough yet (though we came pretty close recently).

No, it isn't (except in the 'in the long run we are all dead' sense). Consider the dot com boom. Over-inflated dot com stock valuations caused large amounts of additional investment in dot coms which were never going to make money, or quite possible provide any useful service at all. The economy wasted resources in pointless rubbish, thus reducing the amount available for consumption and investment in other things.

Stock market valuations and stock market investors motivated by them affect many decisions. Things like: should company x buy company y? What minimum rate of return should we require internally on our investments/what should we take our internal cost of capital to be? Should the current managers be retained? Should we raise money via a new share issue or IPO? What should I, as a VC or private equity investor, invest in and how much money do I get (from sales of businesses) to spend on new investments? What interest rate must the government pay me for me to lend to it instead of buying stocks?

I'm not going to claim stock markets do these well. I don't know the answer and I don't know what to compare them to. Nor will I claim there isn't a great deal of zero-sum or near zero-sum activity going on - that described in the article is almost certainly near-zero-sum (probably somewhat negative). It's quite plain, though, that these decisions have to be made and that they're important. They affect economic growth rates. They affect the distribution of wealth (amongst ordinary people, not just those in the industry). They are most certainly not zero sum.

Re:makes me wonder who earned $2 Billion (1)

nine-times (778537) | about 3 years ago | (#37412604)

I don't think you understand what a zero-sum game is. The idea that, eventually, the stock market will be destroyed (or whatever you're saying) wouldn't make it a zero-sum game. From the wikipedia article:

a zero-sum game is a mathematical representation of a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s)

So the stock market isn't a zero sum game. It's not that stocks are simply traded-- the total amount of wealth in the world grows and shrinks.

2 Points (1)

alexander_686 (957440) | about 3 years ago | (#37412128)

Your right but....

ETF & Delta Hedging – the desk he was on - tend to be “commodity” trading. Simply, low risk / low profit stuff. It’s mostly arbitrage in the classic sense. Pounding out pennies as they say – and you make up the profit with large volume.

As for many players – maybe yes – maybe no. For example, the largest ETF out there is Blackrock’s S&P 500 (SPY). Because it is open ended, this means that Blackrock is contentiously creating shares (and thus having to buy the underlying stock) or destroying shares (and thus having to sell the underlying stock). If he was on the ETF desk and was working with Blackrock (I don’t know if it was Blockrock – but if he were on the ETF desk it would have been with whomever the sponsor of the ETF was) he may be only dealing with a few trades.

Re:makes me wonder who earned $2 Billion (1)

jeffmeden (135043) | about 3 years ago | (#37412188)

You're right, in the end it's net negative thanks to the commissions skimmed by the traders and fund managers. If a company like UBS bought and sold at a loss to the tune of $2B, you can be sure there were benefactors on the other side (say, someone or a group of someones who bought/sold and ended up UP by $2B). If they made one super-stupid purchase that later dropped by $2B, you can be sure that the price bump caused by the buying of all those shares was profited by someone. If it wasn't, the value of their positions would not have dropped, prices don't just go up and down for no reason at all, they change as money goes in or out of a particular stock.

Of course, why would a company give one guy the authority to make horrible trade after horrible trade? Unless of course they were facing huge losses and had to do something to explain it to shareholders (yes companies whose revenue is obtained via buying/selling stocks are themselves bought and sold on the exchange. beautiful, isn't it?)

Re:makes me wonder who earned $2 Billion (0)

Anonymous Coward | about 3 years ago | (#37412192)

Gold is a zero-sum game

Re:makes me wonder who earned $2 Billion (0)

Anonymous Coward | about 3 years ago | (#37412512)

The stock market is not a zero-sum game.

While not a "true" zero-sum game, no dollar ever comes out of the market into an investor's pocket that didn't go into the market from another investor's pocket.

Re:makes me wonder who earned $2 Billion (1)

alexander_686 (957440) | about 3 years ago | (#37412554)

Unless, of course, the underling capital was put to productive work, and grew in value. (Or the company paid dividends)

Re:makes me wonder who earned $2 Billion (0)

Anonymous Coward | about 3 years ago | (#37411692)

FTFS:

trades

This is always spread amongst many.

Re:makes me wonder who earned $2 Billion (1)

instagib (879544) | about 3 years ago | (#37411830)

My guess: he wanted to boost his bonus and gambled. He failed, tried to earn the loss by some more gambling, but as it goes the casino won.

The question is, how was he able to hide these transactions from controlling, and was it even difficult to do that.

To add insult to injury, this is a bailed out bank!

Re:makes me wonder who earned $2 Billion (1)

UnknowingFool (672806) | about 3 years ago | (#37412556)

I read it as trade(s) meaning the employee made many bad choices over a period of time. I also read it as "unauthorized" meaning UBS wasn't paying attention or that he bypassed some safeguards.

Ka-ching! (0)

Anonymous Coward | about 3 years ago | (#37411628)

If he lost $2B, I guess that means someone else made $2B! Seriously, though, the only people at a company who should be even able to lose that kind of money should be senior level executives. What the hell do they do to earn their millions?

Re:Ka-ching! (1)

h4rr4r (612664) | about 3 years ago | (#37411956)

The same thing senior execs do to earn millions at other companies, play golf.

First to trade, first to lose (1)

TiggertheMad (556308) | about 3 years ago | (#37411640)

But if microseconds mean millions in trading ... who has time for checks?"

At that price, who doesn't have time for checks?

Bitcoin (3, Funny)

goombah99 (560566) | about 3 years ago | (#37411894)

I hear UBS is going to go to 100% bitcoin. A spokesman said, "basically there aren't enough computers on the planet to handle a billion bitcoin transactions per hour, so it will be days before the money is actually transferred. This gives us time to roll back anything, plus we can get interest on the float while we wait for the transaction to close."

Bitcoin, is there any problem it can't make better?

Re:First to trade, first to lose (1)

hedwards (940851) | about 3 years ago | (#37411970)

That's the thing. They don't have time to do checks, because it's a race to beat the other vultures to fleece the individual investors. It's still common practice for hedge funds to buy and sell stocks with knowledge of what the prices will be ahead of time on some of the smaller exchanges

Re:First to trade, first to lose (1)

LordNacho (1909280) | about 3 years ago | (#37412036)

Citation needed?

Re:First to trade, first to lose (1)

smooth wombat (796938) | about 3 years ago | (#37412054)

They don't have time to do checks,

Yes, they do. Every trade is supposed to be monitored. Even if it means a few bad trades get through, they can and are supposed to review the accounts, timing, etc that go in to every trade to determine legitimacy and adherence to trading rules.

It's one thing to say you can't check an instantaneous trade. It's quite another to say you can't look at multiple trades your traders make and not pick up on improprieties.

This comes down to willful ignorance. So long as the guy was doing well, it didn't matter if the both internal and external rules were being violated. It is only when trades go bad that, "Oh my! How could that have happened?" comes into play.

For a short time I worked at a brokerage firm and I can tell you, everything you do is watched.

Re:First to trade, first to lose (0)

Anonymous Coward | about 3 years ago | (#37411998)

This trader, the markets he traded and the role he had have not the slightest thing to do with computer systems or milli/microsecond trading. He was a voice trader in a market where trades are very large and thus not traded in high frequency. The last line of TFS is just the usual slashdot bullshit where everyone blames all the problems in the financial industry on computer systems and HFT. I'm still trying to figure out how this site that used to be populated by intelligent, technically literate people has devolved into a cesspool of morons who seem to inherently fear technology that they don't understand.

Re:First to trade, first to lose (1)

LordNacho (1909280) | about 3 years ago | (#37412078)

Pretty simple theory: you see someone with similar skills as you making much more money. How do you feel?

To compare, people here tend not to whine when sports stars make a buttload. You can't really be jealous of someone you don't compare yourself to.

no problem (0)

Anonymous Coward | about 3 years ago | (#37411654)

i just work harder so i can pay more income tax for the bailout... or.. whatever..

I'm a better trader than this guy. (1)

Thud457 (234763) | about 3 years ago | (#37411658)

I would just like to say that I have never lost any company I work for 2 billion dollars.
Not even 2 million.

Re:I'm a better trader than this guy. (1)

Anonymous Coward | about 3 years ago | (#37411762)

I've never even lost 2000.

*checks retirement account*

No, wait, never mind. There it goes.

Re:I'm a better trader than this guy. (1)

Artifakt (700173) | about 3 years ago | (#37412006)

There were several points in my military career where I was signed for over a billion dollars in mobile property, and a few where the amount was over three billion, a lot of it in the form of already loaded full cargo trucks with crates of helicopter turbine engines and such, that could easily have been stolen if I'd screwed up. When I left the service, I had to pay 2 dollars for a missing laundry bag, so i can't quite say I've never lost anything for anyone I worked for. But still, with a record like that, why weren't some large companies competing to offer me a multiple six digit salary to do the same sort of thing this idiot was doing, the day I became a civilian again?

Re:I'm a better trader than this guy. (1)

LordNacho (1909280) | about 3 years ago | (#37412152)

They made you PAY for losing a bag? Seriously? That's a friggin risk of the business. What do they do if you mess up an F/A 18?

I've seen people screw up in trading, and quite simply nothing happens to them. When I was starting out the bosses were always telling us "mistakes cost money" but in the end, they just ate the losses. Part of the business is that people will forget to repo, they'll forget to roll their overnight currency positions, and they'll sometimes accidentally trade millions of dollars by clicking in the wrong place. It happens.

Re:I'm a better trader than this guy. (4, Funny)

jeffmeden (135043) | about 3 years ago | (#37412238)

No offense but a successful career in a high-stakes environment like the military is no preparation for being a complete waste to society and eventually losing $2B on top of it all... For that you need a business degree.

Re:I'm a better trader than this guy. (2)

rtfa-troll (1340807) | about 3 years ago | (#37412612)

Right; you just don't have the killer instinct it takes.

badda da booom

Thanks folks I'll be here all week. Just drop by and take in the show.

You know you read USB at first (1)

Anonymous Coward | about 3 years ago | (#37411702)

Just say it.

Blaming the computer is the easy out... (0)

Anonymous Coward | about 3 years ago | (#37411710)

Don't blame the computer system. It's poor management. How in the WORLD can someone be trusted with BILLIONS of dollars without checks and balances? This bank deserves to go out of business.

Re:Blaming the computer is the easy out... (1)

CharlyFoxtrot (1607527) | about 3 years ago | (#37411948)

I hate to burst your bubble but all banks are like that. The only reason these stories are coming out now is because we're in a bear market and the incompetence of these assholes is being exposed, in a bull market where the rising tide lifts all boats these kind of guys were superstars because hey couldn't lose.

Random delays? (1)

Anonymous Coward | about 3 years ago | (#37411730)

Why do we even allow this real-time trading? It only serves to benefit big investment banks who want to game the system at the expense of other investors.

Exchanges should prohibit these types of games by instituting a random delay of one to two minutes on every trade in the system. Why should a big investment bank with a room full of computers be able to do what the man in the street can't?

Re:Random delays? (0)

Anonymous Coward | about 3 years ago | (#37411786)

You've already answered your own question.

Re:Random delays? (1)

hedwards (940851) | about 3 years ago | (#37412014)

Indeed, it's like those too big to fail banks that still haven't been broken up. IIRC the efficiencies of scale tend to max out somewhere around $100bn in holdings, why we haven't broken up larger ones is purely a matter of politics.

Oligarchies suck, unless you're one of the oligarchs, in which case it's pretty awesome to be able to behave in this sort of sociopathic way and be rewarded for the bad behavior.

Actually, there are benefits (1)

unassimilatible (225662) | about 3 years ago | (#37412590)

HFT has increased liquidity and lowered transaction costs for the retail investor. And how would a delay help? As soon as trading resumed, it would be speed of light machines v.s my fat fingers.

What? (4, Insightful)

J'raxis (248192) | about 3 years ago | (#37411754)

How does a human being engaged in $2B worth of fraud say anything about computer algorithms and millisecond-level trading?

Re:What? (5, Funny)

show me altoids (1183399) | about 3 years ago | (#37411856)

Was this USB 2.0 or 3.0? I wouldn't think 2.0 would be fast enough to lose this much money this quickly.

Re:What? (4, Insightful)

Anonymous Coward | about 3 years ago | (#37412208)

Because the banks could have checks in place to avoid this kind of unauthorized trading, but they chose not to because it would slow down the system a little bit. Bankers believe that a bank implementing all proper security protocols would be too slow to compete in this era of millisecond-level trading.

Re:What? (1)

Daniel Dvorkin (106857) | about 3 years ago | (#37412252)

The idea is that the fraud wouldn't have been nearly as easy if it weren't for the insanity of the trading system. Your question is kind of like asking, "how does a human stealing secure data say anything about operating system security?" Humans choose to commit the crimes, sure; that doesn't mean we should structure the system to make it as easy for them as possible, which appears to be what we've done with trading.

Re:What? (1)

brunes69 (86786) | about 3 years ago | (#37412422)

So if the trade took 1 second instead of 0.01 seconds, it would have been easily noticed???

This is total nonsense. This has nothing at all to do with high-speed trading, if anything it has to do with policy enforcement, plain and simple.

Re:What? (1)

medv4380 (1604309) | about 3 years ago | (#37412614)

If any of this has to do with High Speed Trading or anything really to do with electronic trading it is because of WHO was arrested. FTA

"Adoboli, a University of Nottingham computer science and management graduate"

The investigation is still underway and I haven't seen anything that says how he did it or how long it took just that they noticed Wednesday, Yesterday.
If this has anything to do with HST then the only way to fix it is to put a 24 hour delay on electronic trades. However if this was done over the course of months or years and they just now found out then even putting a delay won't fix it. Your example of trading at 1 second vs 0.01 wouldn't allow for the review nessisary. A second pair of eyes needs to look at the electronic trade.

Re:What? (0)

Anonymous Coward | about 3 years ago | (#37412516)

Bullshit. You're talking out of your ass to try and back up a point you're biased to. The man in question didn't create a bad algorithm that lost $2 billion. And he didn't make trades every millisecond at his desk that lost $2 billion. He just made some relatively normal trades that he was not authorized to do and ended up losing $2 billion for UBS. He took a gamble and got burned. If he made $2B, he would have been sainted by UBS instead of charged as a criminal.

This story really has no place on /. at all. It's not about the trading systems, it's about old as humanity issues of greed and fraud. Just some more FUD to stir up the pot of nerd-rage against Wall Street and their shadowy system of High-Frequency Trade algorithms.

Does anyone care? (0)

Anonymous Coward | about 3 years ago | (#37411758)

Bank lost 2 billion because of a rogue trader. What it should say is they lost 2 billion because of lack of proper management. I love the spin that banks put on these type of events. When did the management of a bank ever take responsibility when they did something stupid?

Re:Does anyone care? (1)

Tridus (79566) | about 3 years ago | (#37411846)

They're not paid enough for that. Seven figure salaries don't cover being responsible for your own failures in this industry. That's something for poor people.

Re:Does anyone care? (2)

fuzzyfuzzyfungus (1223518) | about 3 years ago | (#37411896)

More to the point, isn't it interesting how losing money from "unauthorized" trades is a problem that crops up from time to time; but nobody who makes money on a trade is ever "unauthorized"?

Re:Does anyone care? (1)

LordNacho (1909280) | about 3 years ago | (#37412016)

They've been having board-level meetings about improving their risk management. I'd expect head to roll.

They are paying people to gamble (2)

badzilla (50355) | about 3 years ago | (#37411774)

Sometimes you don't win at gambling. What do they expect? If he had been lucky and instead made a 2 billion profit you would not be reading this.

Bonus (1)

0123456 (636235) | about 3 years ago | (#37411776)

How big a bonus will he get this year?

Re:Bonus (1)

clampolo (1159617) | about 3 years ago | (#37411852)

Tyrone is going to give him a big bonus in his prison cell.

Right.... (5, Insightful)

fuzzyfuzzyfungus (1223518) | about 3 years ago | (#37411818)

These "rogue trader" stories come out from time to time, among employees of all the more respectable class of casino, and they leave me deeply skeptical...

Either these outfits are, in fact, handing people the keys to gigantic piles of risk with controls roughly on par with the ones used to keep bored 16-year-old cashiers from skimming the till, or there is a substantial amount of tacit looking-the-other-way as Mr. Golden Boy flouts the rules and makes huge piles of money, and then, if things go south, his actions were "rogue".

Honestly, I find it hard to believe the former. This industry is riddled with perverse incentives toward taking on outsize risk loads(that hopefully won't blow up until you leave, or will blow up in somebody else's face) in exchange for rewards now. Am I supposed to believe that Poor li'l UBS just got plumb slickered by some smooth talker, or that "rogue" is simply the PR response to those who operate particularly close to the risk/reward envelope and happen to stop producing the numbers that HQ wants to see?

This industry is riddled with perverse incentives (0)

Anonymous Coward | about 3 years ago | (#37411934)

The gigantic piles of risk are shifted onto the taxpayers. They get to keep the keys.

If only the casinos could get the legislature to backstop their customer losses.

Re:Right.... (1)

Pecisk (688001) | about 3 years ago | (#37412032)

I thought *exactly* the same when I first heard the news in more detail. It really feels like systematic abuse (especially when you take their history into account) and dropping all fault on guy when everything goes down the drain.

Re:Right.... (0)

Anonymous Coward | about 3 years ago | (#37412102)

Yep - amazing the difference the sign can make. +$2 billion = Company Hero. -$2 billion = Rogue Trader

Re:Right.... (1)

Attila Dimedici (1036002) | about 3 years ago | (#37412254)

Your skepticism is definitely warranted. I am pretty sure this is the same bank that had a "rogue" trader story very similar to this sometime in the last 10 years. Except in that case, he ended up somewhere in Asia before they tracked him down, with supposedly most (or all) of the lost money in accounts that he controlled.

Re:Right.... (1)

xelah (176252) | about 3 years ago | (#37412452)

This industry is riddled with perverse incentives toward taking on outsize risk loads(that hopefully won't blow up until you leave, or will blow up in somebody else's face) in exchange for rewards now.

I rather suspect it's more like 'Let's give myself a chance of saving my own arse by covering up that $10m loss I shouldn't have made by making an even bigger bet' repeated with exponentially increasing losses than 'Let's see if I can become a hero by making lots of money with a monstrously huge bet which breaks all the rules'. I suspect that breaking the rules imposed on you in a really big mult-$bn way is going to get you fired whether you're successful or not.

"Rogue"? (3, Insightful)

A5un (586681) | about 3 years ago | (#37411822)

So, if you lose money, you're "rogue". But if you win money, you're "managing director"?

HFT is a problem (4, Insightful)

rickb928 (945187) | about 3 years ago | (#37411832)

High-Frequency Trading is a bet, not much different than counting cards at a Las Vegas blackjack table.

You're betting that:

- You get your trade in milliseconds or less before the opportunity vanishes.
- Your coders are not missing anything that would cause you to fail.
- Your coders are sharper than the other coders our there, or...
- You are taking from the humans, and aren't at risk from other HFT code.
- Nothing goes bad in all of this, from comm links to the market platform.

And of course you can always beg the SEC to unwind the transactions, claiming it was a programming glitch. That's been done before. The SEC is no longer an effective watchdog over the industry. It has in effect been 'captured'. Game Over unless Mary can turn it around. Unlikely.

When you dig into how the NYSE actually works today, with DMMs and 'liquidity providers', that one entity can account for 10-20% of total volume, and all of that is HFT, you may realize that the days of humans trading on news and speculation are over. If you want to hold for a duration and take profits over the span of years, just hope you don;'t need to cash out on the same day as the machines have decided they see opportunity in trashing your holdings. Nothing personal, it was an algorithm you know. Just happens.

It's a genuine miracle that we don't see more flash crashes and >$1B fails than we do. HFT is going ot destroy the market, but only for actual humans. One day, when we realize that 70% of the market volume is HFT, we will then understand that the NYSE in particular is a house of cards. Then what?

Re:HFT is a problem (4, Insightful)

hedwards (940851) | about 3 years ago | (#37412068)

More or less, it's astonishing to me that the SEC hasn't cracked down on these scams. It's not like it's some sort of secret, people outside the industry know that Wall Street is largely run on fraud and insider trading and that there are massive bonuses handed out even when a company isn't doing well.

But, as long as the GOP continues to whip up anti-regulator sentiment, it's going to be really tough to get the regulations in place that are going to fix that.

Re:HFT is a problem (1)

DemonGenius (2247652) | about 3 years ago | (#37412200)

It's a genuine miracle that we don't see more flash crashes and >$1B fails than we do. HFT is going ot destroy the market, but only for actual humans. One day, when we realize that 70% of the market volume is HFT, we will then understand that the NYSE in particular is a house of cards. Then what?

This. [imdb.com]

Re:HFT is a problem (1)

Maximum Prophet (716608) | about 3 years ago | (#37412312)

If you want to hold for a duration and take profits over the span of years, just hope you don;'t need to cash out on the same day as the machines have decided they see opportunity in trashing your holdings.

If you diversify your holdings, and sell over time, you don't have much risk from this. When you are young, you should be investing in higher risk investments, but as retirements looms, you should move your holdings into guaranteed vehicles, like bonds. As all this happens over years, HFT shouldn't affect you too much. "Cashing out" is not part of a sane investment strategy.

Results matter: (2)

Hartree (191324) | about 3 years ago | (#37411874)

I doubt they'd be calling it unauthorized if he'd made them 2 billion.

Re:Results matter: (1)

nedlohs (1335013) | about 3 years ago | (#37412062)

They would, but you wouldn't hear about since there'd be no need to make an announcement or have someone arrested. They'd just internally discipline - from sacking to lowering their limits to adding more oversight. Losing $2B is pretty obviously outside your limits whereas you could make $2B without exceeding your trading limits - so they may not notice if their oversight is shit (and apparently it is).

Back Door Code in Trading Algorithims? (1)

BoRegardless (721219) | about 3 years ago | (#37411904)

Suppose you put in a trigger to "toss a trade" so your "friend" at another firm, which only you and your partner friend know how to trigger or exploit.

The payday could be small enough to set you up for life and still be chump change and pass by an audit or the other normal wins and losses each month and wouldn't be easily found out as long as everyone kept their mouths shut.

This is the danger of electronic algorithmic trading. No doubt there are safeguards in place, but that doesn't mean they can catch an exploit that may only be two lines of code.

Re:Back Door Code in Trading Algorithims? (1)

boner (27505) | about 3 years ago | (#37412096)

The market is anonymous, unless you and our 'friend' agree on which product to trade you have no way of identifying the other party. On popular products, i.e. Google or Apple, this is impossible. On other products liquidity (trade volume) is so small that such transactions would stick out like a sore thumb.

On top of that, it will take a lot more than two lines of code to defeat all the checks and balances in trading code. These checks and balances usually trace their origin to things having gone wrong in the past. I would expect all trading firms to have good source code management systems, your 'enhancement' will not go unnoticed.

Re:Back Door Code in Trading Algorithims? (1)

HornWumpus (783565) | about 3 years ago | (#37412374)

Wouldn't take but one database entry.

In risk management there are far more commodities traded then you have good market data for.

What you do is assign proxies for all commodities so you can aggregate your risk exposure. For example (pulled from a dark place) electricity traded in Phoenix could be proxied as 50% four corners, 50% S. Cal.

To break risk management you simply have to mis-proxy a commodity trade. Switching a sign on the commodity that you do half your trading on will turn a huge exposed position into a risk free position.

Disclosure: I wrote risk management for electric power trading and scheduling systems. Had a bug report once because a large S.Cal power company overflowed the total value at risk (IIRC it only had 9 digits).

Re:Back Door Code in Trading Algorithims? (0)

Anonymous Coward | about 3 years ago | (#37412376)

I would expect all trading firms to have good source code management systems,

Warning... Steep learning curve ahead.

You'd be surprised...

Re:Back Door Code in Trading Algorithims? (0)

Anonymous Coward | about 3 years ago | (#37412378)

On top of that, it will take a lot more than two lines of code to defeat all the checks and balances in trading code.

Checks and balances? Ha! There have been comments from HFT programmers here on slashdot that brag about how they have to and can code and push out new versions in a matter of minutes. Do you think rock stars like that waste time on such petty things as checks and balances?

greed (0)

Anonymous Coward | about 3 years ago | (#37411944)

"for lack of a better word greed, is good" it makes you make crazy decisions and even more crazy ones (usually under the cover of darkness) to cover the first wave of crazies... end of the day you loose 2B, gets reported all over the world, and after 2 weeks world move on (limping) as it never happens.. until, the next guys thinks "greed is good".

This level of trading is hazardous to the world (3, Insightful)

erroneus (253617) | about 3 years ago | (#37411984)

I think it is increasingly clear that the more developed this trading gets, the more risk it offers the world's economy. It is also recognized that "safeguards" need to be in place to prevent certain things from happening. These same safeguards also serve to decrease that highly sought-after and desirable "leverage" power when making trades. These market people have been pushing regulators to remove such safety restrictions which have apparently been connected with all manner of troubles including the most recent market failure.

I wouldn't be against banning the markets entirely. I think Hitler had it right in his analysis of why speculating is such a problem for economic stability. (Just as in the legal system, the only real winners are the lawyers)

Of course the world's bankers would never allow any governments to take their playground away, but that's what I think should be done.

Re:This level of trading is hazardous to the world (0)

Anonymous Coward | about 3 years ago | (#37412250)

The real risk is that someone can lose $2billion.

A single person shouldn't be able to move that much money around without anyone knowing.
It really points to a problem at UBS that a single individual is able to move such sums around without supervision.

This is hundreds of multimillion dollar deals, or a large number of smaller deals. Such activity should have been noticed by someone.

Fortunately occurrences like this make everyone a bit more aware and careful to ensure they have appropriate safeguards. If they have good safeguards, like I assume most large institutions should, the typical rougue trader should only be able to mess up a few hundred k or million before getting caught, not billions, or even hundreds of millions.

Not so surprising (3, Informative)

LordNacho (1909280) | about 3 years ago | (#37411988)

First of all, he'd worked in the back office, so he'd know both people and procedures.

Second of all, anyone who's ever worked in finance can tell you big banks are chaotic. It's not really that strange that he can go about his business undetected for a while, because there's loads of traders with loads of portfolios. And most people on one desk are not going to be experts on the business of another. UBS has had a number of restructurings since the financial crisis. People are moved on, some desks are closed, some are merged, it's gonna be a mess. Makes it easier to hide.

Third, risk officers are not what you think. They are not the internal police, vigilantly keeping an eye out for every possible transgression. They look at the positions, calculate the risk (big can of worms, don't ask), and when someone is over their limit, they show up at the trader's desk and are told to fuck off.

Finally, it is not at all clear that technology played an important role in this fraud. Yes, some HFT market makers trade ETFs, but it's not clear his desk was. That doesn't mean a software error caused it, or that the fraud could not have occurred without whatever system he was using. From efinancial (which you need a subscription to read) the latest rumour is that he messed up a hedge in EURCHF, and his attempt to fix it made it worse.

Re:Not so surprising (1)

afidel (530433) | about 3 years ago | (#37412304)

I don't know, I'm pretty surprised that things are lax enough that a single trader can lose ~9 months of the companies profits.

Re:Not so surprising (1)

LordNacho (1909280) | about 3 years ago | (#37412458)

Profits are quite variable at a big bank in turmoil.

I can understand your surprise, but he's trading financial products. Most of them are simply numbers on a screen. There's no extra effort involved in buying 100M bucks worth of something over say 100K. It's not like if he bought and sold widgets which actually have to manufactured and delivered. And for the same reason, the bosses can't see him doing it either.

And if you wonder why it can be done at all, it's because you have to move a lot of money around to make money in this business. Suppose you're doing an arb of 100M of eg Coca Cola vs 100M of Pepsi, your risk is pretty low. (One cancels the other). But if you were to do just one of the two, you're suddenly taking a huge risk. But who is gonna be able to tell from casual observation?

Big banks in particular have a bunch of stuff going on, hirings and firings, new systems, that type of thing.

Here's the guy: (2)

oGMo (379) | about 3 years ago | (#37412074)

UBS Rogue Trader Loses $2 Billion In Unauthorized Trades

They're investigating now. Apparently it was this guy:

@

Report anything to the nearest K. Last seen running toward a > .

More basic problem that computer systems' speed (0)

Anonymous Coward | about 3 years ago | (#37412112)

The guy involved was reported to work with ETFs (exchange traded funds), which are baskets of underlying goods (stocks, commodities, bonds etc). They are like mutual funds, but are gaining popularity, because the values change throughout the day and they tend to have fewer fees than mutual funds. So instead of buying, say, a Fidelity growth stock fund, investors buy a "growth stocks" ETF.

Here's how it works - if people buy the ETF, the administrator of the ETF goes and buys more stocks, commodities or whatever else is in the basket. If investors sell the ETF, the administrator sells the stuff.

ETFs have raised a lot of questions among the skeptical set because you can do a lot of monkey business if the basket involved contains illiquid stuff and derivatives. Essentially, the person administering the basket has a lot of leeway in how they value this stuff because you have to guess what it's worth - there are no up to the minute prices like you get with stocks. There's the temptation to say the stuff is worth you want it to be, the financial institution who administers the ETF to dump risky stuff into it, or the bank to misprice the stuff they dump into it. Moreover, when markets freak out, it can become harder to keep the ETF in line with the value of the stuff in the basket - and you could have a serious problem if investors dump the ETF, and you are forced to sell the illiquid stuff that it holds at firesale prices.

Now we don't really know what happened still. But it's worth noting that London is where the really dodgy ETFs have clustered for regulatory reasons. And UBS, his firm, has a rather poor record in risk control.

Not really new - Barings was ruined in 1995 (0)

Anonymous Coward | about 3 years ago | (#37412146)

http://en.wikipedia.org/wiki/Barings_Bank

Despite surviving the Great Depression and both World Wars, Barings was brought down in 1995 due to unauthorized trading by its head derivatives trader in Singapore, Nick Leeson.

Pure Bullshit (0)

Anonymous Coward | about 3 years ago | (#37412150)

Not the 'rogue' part, just the part where anyone expects the public to believe this isn't a calculated skimming off the top by some part of the roguish fortunate few who sit in high places eating someone else's lunch.

Details Details Details (0)

Anonymous Coward | about 3 years ago | (#37412216)

Firstly, there is no indication of HFT involvement. In fact the square mile grapevine reports he worked on a Delta 1 desk, which is not usually run as HFT. Maybe some autohedging tools to try and keep Delta ~ 1 (or as close as) , but that's it.
Secondly, the real question - checks and balances. How do 2 yards get lost? Maybe, if the trade(s) had gone the other way, it would be bonuses and reach-arounds, instead of the current situation.
Thirdly, there is a lot of speculation on the specifics of the type of trade(s) that might have caused this. I would be surprised if ETFs were the direct cause, but errant hedges on EURCHF, or USDCHF could be closer to the ballpark. Think - did a certain central bank intervene recently? Did everyone expect it?

This is the same ***hole! (1)

Kamiza Ikioi (893310) | about 3 years ago | (#37412308)

This is the same A-hole who requested an iPad with company paid data plan from AT&T from IT! I knew he was up to no good the moment he mentioned AT&T! Think how much money would have been lost paying those data overages!

- UBS anonymous IT personnel (not authorized to make a statement)

Crazy conspiracy theory (0)

Anonymous Coward | about 3 years ago | (#37412338)

Wasn't UBS forced a few days ago, after many months of pressure, to reveal information about tax dodging accounts?

Is this a way to cover up $2B of someone's tax dodge who really, really didn't want to be reported to the US government?

Nyahhh. Crazy talk. Just sayin'

Looking for a New Job? (1)

MichaelCrawford (610140) | about 3 years ago | (#37412438)

Quantitative Investment Software coding is just about the highest paying work a software engineer can get. The jobs typically start at $150,000 per year, and can pay as much as a million if you're really good. It's all written in C++, with Linux being the operating system in recent years.

But you have to work in New York City. I don't want to live there, I think I'd go nuts. I've been looking for West Coast quant work, but none is available. You'd think there would be, as all the investment houses have offices in the West, but I guess they don't do their development there.

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