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IT Could Have Caught $2 Billion Rogue Trader

timothy posted about 3 years ago | from the hindsight-is-way-better-than-20/20 dept.

Businesses 179

superapecommando writes "With the benefit of hindsight, IT experts are claiming that technical countermeasures at Swiss bank UBS could have stopped rogue trader Kweku Adoboli running up a $2 billion loss." If American Express and Visa can mine transaction data and put a stop order on credit cards when you unexpectedly buy gas out of state, it seems like there could be patterns to watch for when the amounts are in the billions, too.

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Sure... (0, Interesting)

Anonymous Coward | about 3 years ago | (#37427792)

... but said IT is the department that get's downsized on every occation; it only costs money and add's no value, rrrrrrrrrrrrrrright?

perhaps, perhaps not (4, Insightful)

Trepidity (597) | about 3 years ago | (#37427796)

A problem is that it's difficult to design a system to automatically determine "risky" or "rogue" or "non-normal" behavior in investment banking, because taking crazy bets is what they do, and interpreting their official policies loosely is a big part of that. Sometimes it turns out massively well, in which case bonuses all around; other times very badly, in which case start looking for ways to label the guy "rogue" and fire him. But it's de facto, if not officially, part of "normal" operation of an investment bank; it just sometimes turns out badly.

Re:perhaps, perhaps not (0)

adamchou (993073) | about 3 years ago | (#37427836)

Sure, they make plenty of trades that are risky in the sense that there is a high probability for loss. However, they shouldn't be making those kinds of trades when the potential loss is in the billions. That's an absurd amount of money to be using in high risk trades.

Re:perhaps, perhaps not (2)

khallow (566160) | about 3 years ago | (#37428104)

It's all relative. That depends on how much they're trading and the tolerance for loss of the people who have the money. If I have a trillion dollars and a high tolerance for loss (and trading with that in mind), then two billion dollar in losses would just be a slightly below average day.

Re:perhaps, perhaps not (1)

SerpentMage (13390) | about 3 years ago | (#37428800)

I have worked on order books for investment banks. The problem here was that he hedged himself with fake trades. A system cannot detect that. What they can detect is if the hedge is not legal. And to catch an amount like saying, "oh look he has a 20 billion trade let's stop it" does not work. Since banks literally have trillions on their books, with trillions as hedges.

The problem is that he short circuited the order books and some IT code did not balance the books properly.

Re:perhaps, perhaps not (0)

Anonymous Coward | about 3 years ago | (#37427878)

I think people do relish the opportunity to endulge in schadenfreude where banks are concerned though. People latch on to a phrase like "casino banking" and gleefully apply to everyone in the industry with the intent that we should shut it all down. By the same logic:

A police officer took a bribe, we should shut down the police.
Well, there was teacher who was a paedophile once. We should shut down schools too.
Look at that corrupt politcian, shut down the government while you're at it.
The guy at Blockbuster charged me for bringing a DVD back 5 minutes late. Shut down them too!

Re:perhaps, perhaps not (5, Insightful)

Pinky's Brain (1158667) | about 3 years ago | (#37428046)

We shouldn't shut it down, but we should disallow them to use government guaranteed deposits for it. Deposit banks should not be allowed to use their depositor money for leveraged investments or derivatives.

Re:perhaps, perhaps not (4, Informative)

jrminter (1123885) | about 3 years ago | (#37428246)

Wish I had mod points... You got that exactly right. Here in the US, the politicians could not resist the clamor to repeal the Glass–Steagall Act of 1933 that made that distinction between commercial and investment banks. Set us on the road to the mess we have now...

Re:perhaps, perhaps not (2)

kurt555gs (309278) | about 3 years ago | (#37428324)

It is time to bring back both the Glass–Steagall Act of 1933 and the Smoot - Hawley Trade and Tariff act. Unless you really want Des Moines Iowa to look just like the slums of Brazil.

Re:perhaps, perhaps not (2)

CharlyFoxtrot (1607527) | about 3 years ago | (#37428776)

I think people do relish the opportunity to endulge in schadenfreude where banks are concerned though. People latch on to a phrase like "casino banking" and gleefully apply to everyone in the industry with the intent that we should shut it all down. By the same logic:

A police officer took a bribe, we should shut down the police.
Well, there was teacher who was a paedophile once. We should shut down schools too.
Look at that corrupt politcian, shut down the government while you're at it.
The guy at Blockbuster charged me for bringing a DVD back 5 minutes late. Shut down them too!

The difference with the banks is that in the banks it is a structural problem with the behavior being so deeply ingrained in the culture it's difficult to see how it could be changed. Especially since they have the power to avoid outside pressure to reform.

You do have cases where the police have a structural corruption problem too, or where the government is corrupt to the point where it no longer functions. Just look at many third world nations. And yes, when that happens people need to intervene.

Re:perhaps, perhaps not (1)

Dutchmaan (442553) | about 3 years ago | (#37427922)

So it's glorify the gains and criminalize the losses!!! Where have I heard something like that before.. hmm...

Re:perhaps, perhaps not (1, Insightful)

dnaumov (453672) | about 3 years ago | (#37427934)

There is no "problem". Any investment bank that is not actually retarded has realtime systems that monitor overall risk of the entire bank it's, any given branch and any given desk.

Re:perhaps, perhaps not (1)

dnaumov (453672) | about 3 years ago | (#37427958)

And to expand a little further: there is nothing crazy or stupid about making trades sized in the billions. It's not even that uncommon either. Quite a few companies are doing arbitrage trading with trades in the hundredss of millions on a regular basis, where the profit on whatever they are trading is miniscule, but the massive volume makes up for it. The obvious thing is that you are supposed to be hedged. Doing trades in the billions unhedged? Yeah that is absurd. What's even more absurd is that the alarm did not go off the second the trader's and the bank's risk exposure went bananas.

a hedge worth having (3, Insightful)

epine (68316) | about 3 years ago | (#37428054)

The obvious thing is that you are supposed to be hedged.

You need to imbibe some Argumentative Theory [edge.org] , followed by a Black Swan shooter.

There's a mathematical definition of hedge, and there's the social theory of hedge. The later means "but I think I can get away with it, so it's OK". The mathematical version depends on having correct variance models. If you don't, no hedge exists. Taleb 101.

Society would benefit from hedging itself against the tendency of bankers to hedge themselves deep into the grey zone.

Seriously, bankers talking about risk is a lot like Tom Cruise interviewed after filming Days of Thunder appearing to say--very fervently--that the idea from the movie that you can't control circumstance at 200 mph is full of baloney and that he really got mad filming those scenes where other characters throw this in his face. He races his own cars and believes in control over destiny, which is common among people who take insane risks.

Even if you have LTCM wonks dictating algorithms to be coded by nuclear power engineers and run in NSA bunkers, you can't escape precipice risk. But you can shepherd all the risk with your border collie safeguard systems into the universal millisecond of doom.

So in the lingo, an unhedged risk is the one where only one bank has egg on its face, and a hedged risk is where every fucking bank has egg on its face, and greater society picks up the tab.

there was an old lady who swallowed a fly (1)

epine (68316) | about 3 years ago | (#37428078)

In my coda, the question is whether this parable applies to the lone guy at the trading desk, or to the evolution of computerized trading safety nets which ensure that no one fails until we all fail, Dr Strangelove style.

You be the judge. No hedge achieves measure zero.

Re:a hedge worth having (2)

WoOS (28173) | about 3 years ago | (#37428180)

So in the lingo, an unhedged risk is the one where only one bank has egg on its face, and a hedged risk is where every fucking bank has egg on its face, and greater society picks up the tab.

This is the general problem with short-term speculation. It is a (near) zero-sum game (the near due to possible arbitrage gains from providing liquidity for long-term trades). Yet for years banks have posted record gains out of it. That money had to come from somewhere. It came out of the coffers of the financial institutes which had to be saved by governments in the last financial crisis.

And had UBS lost not only 2 but say 20 billions, it would too have to be saved (again) by the Swiss government. Yet the 20 billions would have turned up on several people's bonus/dividend slip.

Re:perhaps, perhaps not (1)

Pinky's Brain (1158667) | about 3 years ago | (#37428062)

Steamrollers can't be hedged ... if you are getting much better returns than treasuries in an efficient market with no inside information you're running much bigger risks, period.

Re:perhaps, perhaps not (1)

NatasRevol (731260) | about 3 years ago | (#37428178)

Wall Street's belief is that there is an efficient market, when there clearly isn't.

I bought a Sept 17, $27.50 put on RIMM on Thursday at $75. I sold it on Friday for $425. If I was riskier I could have put $7500 out and made $42,500. In 18 hours.

No inside information, I just believed that RIMM was going to go down - like a lot of other people - yet them market was not efficient enough to see this drastic change.

Re:perhaps, perhaps not (2)

Trepidity (597) | about 3 years ago | (#37428334)

I don't think Wall Street really believes in efficient markets. A large part of what investment banks do (on the "prop trading" side) is attempting to exploit market inefficiencies via various kinds of arbitrage plays.

Re:perhaps, perhaps not (1)

ThatsMyNick (2004126) | about 3 years ago | (#37428736)

A large part of what investment banks do (on the "prop trading" side) is attempting to exploit market inefficiencies via various kinds of arbitrage plays.

Thereby, making it efficient?

Re:perhaps, perhaps not (1)

alexander_686 (957440) | about 3 years ago | (#37428722)

First, the guy is accused of fraud, which implies that maybe he was not complying with the firm's risk monitoring system. (No proof of that yet.)

Second, it's not as easy as you think.He was on the derivatives desk, which can be tricky but can be handled. He was a UBS, which is in multiple markets, which is another curve ball. American options need to be handled one way, European options a slightly different way. It can be hard to sum all of these positions.

Which is why I don't like the summary. For credit cards you have millions of people buy basically the same things. It is easy to see patterns. In investments you have dozens to scores of strategies that change yearly. CMO bonds one year, Swaps the next, Indian equities the next. From a DB viewpoint it is a nightmare. Each position having it own little quirk meaning you have to modify the Security Master table with new fields being populated by wildly different data sources.

It's a Red Queen's race, each firm trying to reach the next level - and you don't build the IT system to last because you know there is going to be another overhaul in 2 years.

Re:perhaps, perhaps not (1)

jonbryce (703250) | about 3 years ago | (#37428884)

And it is worth noting that European and American options don't refer to the market they are available on, you can get both types on both markets. European options can only be exercised on the expiry date, whereas American options can be exercised at any time.

Re:perhaps, perhaps not (0)

Anonymous Coward | about 3 years ago | (#37428010)

"Any investment bank that is not actually retarded has realtime systems that monitor overall risk of the entire bank it's, any given branch and any given desk."

That's why I make the risky trades with my cellphone on the crapper, just like this guy, no monitor there.

Re:perhaps, perhaps not (1)

DarkIye (875062) | about 3 years ago | (#37428098)

Wouldn't that make people far too accountable?

Re:perhaps, perhaps not (1)

JamesP (688957) | about 3 years ago | (#37428464)

There is no "problem". Any investment bank that is not actually retarded has realtime systems that monitor overall risk of the entire bank it's, any given branch and any given desk.

Yes, they would probably have that, if IT wasn't so retarded and took ages to 'test' the solution. Of course, the crap they install in the computers is approved right away.

Re:perhaps, perhaps not (2)

CharlyFoxtrot (1607527) | about 3 years ago | (#37428812)

That's the theory and yet all these major banks keep coming out with these rogue traders and that's only the losses big enough that the general public hears about them. Let's face out out on the terrain no-one is holding these guys accountable. IT may set up the system, Risk Management may generate the reports and they'll be either modified to say what management wants to say or just plain ignored because like all gamblers these guys think they have a system which lets them keep on winning even as they are betting their house (or in this case our houses.)

Re:perhaps, perhaps not (2)

TarPitt (217247) | about 3 years ago | (#37428682)

And the culture in these organizations celebrate risk-taking, and handsomely reward those who take huge risks, and will do anything to resist restricting those "heroes".

No organization like this is going to restrict their "heroes" and money-makers with automated software that tries to second guess trading patterns.

I'm saying this as someone who was asked to leave the HR VP's office of one of these organizations for suggesting that compliance with security policies be part of annual performance review. Quoting from memory, "There is no way we are going to penalize our star salespeople for not following a password policy"

BTW, our security assessment found that bad passwords were a huge problem, to the point where a few minutes of guessing gave us some very powerful access.

The computer is always guilty (4, Insightful)

PolygamousRanchKid (1290638) | about 3 years ago | (#37427802)

When a financial boo boo occurs, and IT is involved, it's IT's fault.

When a financial boo boo occurs, and IT is not involved, it's IT's fault.

Computers have a tough time defending themselves, so it is easy to pin the blame on them.

Maybe Watson, IBM's Jeopardy champ, could handle this:

"What . . . is a 'Scapegoat'?"

Re:The computer is always guilty (1)

dintech (998802) | about 3 years ago | (#37427850)

Have you every heard the phrase "the customer is always right"? I'm not saying that they are and clearly not in this case however in banking, as in a lot of environments where you have only a small group of users, this is often how things play out.

If you're independent and not part of the same company, you can always invite blame-oriented clients to take their business elsewhere. If you tried that in a large company, the only person going somewhere else would be you.

Agreed it sucks, but at least UBS IT bonuses will be good the following year when they implement new controls.

Re:The computer is always guilty (0)

Anonymous Coward | about 3 years ago | (#37427990)

Yep, and IT are the service providers to the true bankers.

Suck it, bitches.

Re:The computer is always guilty (1)

prefec2 (875483) | about 3 years ago | (#37427874)

We have a saying (which loosely translates to): When the boor can't swim, then it is the swimsuit's fault.

Re:The computer is always guilty (0)

Anonymous Coward | about 3 years ago | (#37427986)

In other news, the fired IT guys scrap the idea of seismology and geology as their fall back career.

Blame the bank administration (5, Insightful)

msobkow (48369) | about 3 years ago | (#37428006)

The blame should be placed squarely on the shoulder's of the bank administrators. There is absolutely NO EXCUSE for not noticing a 2 BILLION DOLLAR LOSS.

It's not the computers.

It's not the traders.

It's not the system.

It's the BANKS ADMINISTRATION.

And it's high time that those lazy incompetent greedy bastards were held RESPONSIBLE for their incompetence instead of getting "bonuses."

Re:Blame the bank administration (2)

MartinSchou (1360093) | about 3 years ago | (#37428412)

And it's high time that those lazy incompetent greedy bastards were held RESPONSIBLE for their incompetence

They will. Oh, how they will! This year they'll only get 95% of the bonuses they got last year. That'll teach them!

Re:Blame the bank administration (1)

Hatta (162192) | about 3 years ago | (#37428526)

I would bet you anything that this "rogue trader" was tacitly, if not explicitly, encouraged in his behavior. As long as he kept getting lucky, everyone profits. As soon as his lucky streak ends, he's a rogue trader.

Re:The computer is...NO DISASSEMBLE!!! (0)

Anonymous Coward | about 3 years ago | (#37428008)

It's a machine, Schroeder. It doesn't get pissed off, it doesn't get happy, it doesn't get sad, it doesn't laugh at your jokes...

IT JUST RUNS PROGRAMS.

Re:The computer is...NO DISASSEMBLE!!! (1)

JustOK (667959) | about 3 years ago | (#37428042)

the programs run it

Re:The computer is always guilty (0)

Anonymous Coward | about 3 years ago | (#37428470)

Sorry, but computers are such a big part of today's world, and in my experience, IT is so incompetent, usually the blame truly does lie with IT. So, what is a scapegoat? A: irrelevant. IT really IS at fault.

lack of liability (3, Interesting)

azalin (67640) | about 3 years ago | (#37427812)

In my humble opinion the attitude in the finance sector has to change away from gambling and back to investing.
Btw. How comes those people only get bonuses and not fines to?

Re:lack of liability (4, Insightful)

prefec2 (875483) | about 3 years ago | (#37427884)

Because that would be fair. The whole thing is to privatize profits and let the public pay the bills. And by the way there is too much money on the market to really invest all that money and get something in return. But it is not only the financial market. You can found companies and relay responsibility for bad business decision to the banks, stakeholders etc. To make things right, the size of organizations in the financial and business area have to be limited.

Re:lack of liability (1)

Anonymous Coward | about 3 years ago | (#37428004)

Bad traders don't stay traders for long (and don't keep clients for long either). In general they do at least as well as the market, their bonus reflects how much better than the market. Even when you get the occasional epic cock up (maybe causing a financial crisis) there will still be well paying clients for the companies who survive, so money continues to flow in, as do the bonuses.

Also, a large portion of this bonus money goes straight into the government purse. People like to forget that for some reason. I think I remember seeing a few years ago that (total) taxes from the financial sector in the UK pay for nearly the entire education budget.

Re:lack of liability (1)

rednip (186217) | about 3 years ago | (#37428066)

Also, a large portion of this bonus money goes straight into the government purse.

Nope, at least in the U.S., unearned income is taxed at a 15% thanks to the Bush tax cuts. Also, 'unearned income' includes the trader's bonus money.

Re:lack of liability (1)

khallow (566160) | about 3 years ago | (#37428136)

15% is considerable even if you think the percentage should be higher.

Re:lack of liability (1)

GlobalEcho (26240) | about 3 years ago | (#37429016)

Actually, you are incorrect. You are probably thinking of partners in private equity. Trader bonuses (and all others' cash bonuses) are taxed as ordinary income...I know this firsthand.

The tax dodge for private equity is that they don't get money, but rather stock whose appreciation is taxed at capital gains rates. Its typically stock they are not allowed to sell and turn into cash, and is therefore regarded as an "investment". They are taxed at ordinary (35%+$state) rates on the initial grant of, say, $1MM in stock but the subsequent 20% per year gains (if they happen) are taxed at the 15% capital gains rate.

Re:lack of liability (1)

Pinky's Brain (1158667) | about 3 years ago | (#37428110)

It's empty money, it's far easier for money to stop flowing (which it will very soon, a new crisis is inevitable) than it is for trade of necessities to do so. A national economy build on the profits of a finance sector is far out on a limb.

Re:lack of liability (1)

CharlyFoxtrot (1607527) | about 3 years ago | (#37428900)

I think I remember seeing a few years ago that (total) taxes from the financial sector in the UK pay for nearly the entire education budget.

Considering financial services now make up 10% of UK GDP [217.154.230.218] the taxes on it should be paying for more than just the education budget. Sounds like they are undertaxed [euractiv.com] compared with other industries.

Re:lack of liability (1)

satuon (1822492) | about 3 years ago | (#37428232)

There is always risk when investing that the enterprise might fail. You don't know the future, so you can't have investing without some degree of gambling. Risk have to be taken in real life too, not just in the casino.

Re:lack of liability (1)

Xugumad (39311) | about 3 years ago | (#37428808)

> Btw. How comes those people only get bonuses and not fines to?

The bigger question should be about level of bonus. An institutional trader is generally accepted to be taking less personal risk, than an individual trader, and that's fine, but should be paid in proportion to the risk relative to the risk taken on by their employer. As it stands, there's a trend towards "I made $BIGNUM for my employer so should get a sizable fraction of that as a bonus" without anyone going "Okay, but what was your employer's risk, not to mention overheads, in enabling you to make that profit?"

(And yes, you do get individual traders, even individual algorithmic/high-frequency traders, although typically it's considered loosely on par with hand grenade juggling in terms of personal risk)

Re:lack of liability (1)

GlobalEcho (26240) | about 3 years ago | (#37428982)

Actually, in this case, Adoboli will go probably to jail and the compensation of bonus-eligible UBS employees will be reduced by a sizeable amount. That's basically like a fine, whether or not you think they make too much money in the first place.

Re:lack of liability (0)

Anonymous Coward | about 3 years ago | (#37429038)

At my bank that is called claw-back. Bonuses are awarded and paid over a three year schedule. Screw up enough, and they'll take back some unpaid bonus. This applies at the individual, team and group level.

This policy was put into place in 2009, and to the best of my knowledge it has not been used.

You think? (2)

igreaterthanu (1942456) | about 3 years ago | (#37427816)

Any entrance level programmer could make a system that alerts a superior of the performance of one of these people.

Say an alert when the losses are over $100,000 then over $1mil, $10mil, $100mil, etc. or maybe after 50 losses in a row.

It says a lot about this bank that this wasn't caught earlier. An alert should have been triggered far before the losses got to the 2bn mark.

Re:You think? (1)

Anonymous Coward | about 3 years ago | (#37427846)

NO computer in the world could of predicted the swiss pegging themselves to the Euro and no trader would of considered that risk as it was unthinkable.

from the perps Facebook page on September 6 simply read “need a miracle”, the same day the swiss pegged.

http://www.zerohedge.com/news/ubs-rogue-trader-had-been-reduced-watching-fox-news-guidance

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37427848)

They were just waiting for his losing streak to break. Just like any other gamblers - except these guys get bailed out.

Re:You think? (3, Informative)

tqft (619476) | about 3 years ago | (#37427870)

The problem isn't detecting the loss after the event the problem is predicting 23 sigma moves.

http://www.zerohedge.com/contributed/ubs-and-big-trade [zerohedge.com]
The trade was profitable until the SNB capped the CHF , capping the trade and trader in the process. At least that is a reasonable working hypothesis. Everything was fine until a week ago. What happened then? The Swiss National Bank announced a cap of their currency vs the Euro.

Why did he have such a large position ? That Risk & Management MUST have known about. And were OK with while it was a winner. When it became a loss, the trader was shafted.

Re:You think? (2)

julesh (229690) | about 3 years ago | (#37428020)

The problem isn't detecting the loss after the event the problem is predicting 23 sigma moves. [...] Why did he have such a large position ? That Risk & Management MUST have known about.

A few things occur: if it really was a 23 sigma move (I haven't been watching the markets lately, so didn't know what was going on), then the fault really is neither the trader's nor particularly the management of the bank's, but rather the entire industry's. We're talking about an international system of de-facto standard risk management that assumes the worst net losses these traders will sustain is around 5 * sigma. If he'd lost what the models predict he was risking, which is to say about $400 million, I doubt anyone would have made this much fuss. He may have been fired (or perhaps he just wouldn't be getting his bonus this year), but we wouldn't have heard about it. They simply need to start thinking more about the non-trivial risk of unexpected large scale movements (which are not readily accounted for by the standard statistical approaches that are commonly used) and the effects they can have.

Re:You think? (2, Insightful)

Anonymous Coward | about 3 years ago | (#37428092)

if it really was a 23 sigma move

It can only have been a "23 sigma" event if the model by which such statistics are established was utterly irrelevant.

This is the systemic problem with banking... the "risk control" is quite sophisticated - but it takes a narrow view of what constitutes risk... and, hence, no-one should be surprised when real-world risks are spectacularly under estimated. A cynic might argue that the whole subject of risk management is an elaborate illusion to give the impression that risks are being taken seriously. The reality is that where risks can't be argued to be marginalised by elaborate argument - they're outright ignored... and the complexity of the systems is relied upon to prevent scrutiny.

Writing software gives something of a unique perspective on risks... software engineers aim to "prove" the software they write - and bugs are declared whenever any sequence of events is established that would, theoretically, lead to an unacceptable outcome. It's considered "too cowboy" to argue that a bug doesn't exist because the client hasn't get generated that sequence of events in the live system. Conversely, this is exactly how risk management works for financial risks - and it is this deceit that has provided the illusion of large profits and the bonuses that accompanied them.

Re:You think? (1)

GlobalEcho (26240) | about 3 years ago | (#37429080)

bugs are declared whenever any sequence of events is established that would, theoretically, lead to an unacceptable outcome. It's considered "too cowboy" to argue that a bug doesn't exist because the client hasn't get generated that sequence of events in the live system. Conversely, this is exactly how risk management works for financial risks.

That is a very interesting perspective. In this particular case, though, it is likely Adoboli bypassed risk systems, booked fake trades a la Nick Leeson, or set parameters to hide the risks. In this case the proper analogy is something closer to making systems robust to, say, SQL injection attacks, which of course we know not all programmers do even when they should.

Re:You think? (3, Informative)

NoOneInParticular (221808) | about 3 years ago | (#37428254)

You do realize that a 23 sigma event implies the belief in a risk model where an event like this will happen once every 10^112 years?!! You also do realize that the entire financial sector is using these risk models, and are therefore still assuming that 23 sigma events will only happen once every googol lifetimes of the universe? A hedge like this, that will only fail once every googol universes as predicted by economics (and is thus a safe bet on the surface), tends to fail every few years.

Sigma measurements of risk is intellectual fraud, on a scale that is costing us billions.

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37428766)

The "statistical" models used aren't a fraud, they're just stupid. They're based on the Central Limit Theorem, which contains the conditions "if sigma inf" and "as n approaches inf". In financial markets, sigma is very high (believed by many to be infinite) and the size of n at which the theorem becomes reasonable is therefore absurdly high.

Most of the guys who studied statistics and financial markets with me passed without ever getting that bit.

Sorry, I haven't used my account in a while so I'm posting AC.

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37428940)

If sigma is less than inf. Slashdot ate the symbol.

Re:You think? (1)

GlobalEcho (26240) | about 3 years ago | (#37428962)

People who think the financial sector is using only these multivariate normal risk models (if I correctly interpret what you mean by "sigma models") are incredibly naive. Many of them have read and believed the books by N. Taleb, which I find tragicomic.

You may have noticed that thousands of extremely smart mathematicians and physicists have been hired by the financial sector over the last decades. Do you really think all those clever people somehow missed something so blindingly obvious?

As I've said elsewhere, it is unlikely this whole situation arises from an unusual market event combined with normal operations at UBS. Far more likely, Adoboli was able to hack the risk system into assuming the EUR/CHF exchange rate was constant. This is known as operational risk and is not very amenable to quantification.

Yes (2)

Kupfernigk (1190345) | about 3 years ago | (#37429246)

I'm sorry, but all the smart mathematicians and physicists in the world can only derive better models and better algorithms. What the financial sector seems to have failed to do is to employ enough psychologists. Taleb isn't wrong; he has pointed out that the models cannot account for random political events, for psychological forcing, or natural disasters. The probability of these cannot be reliably assessed.

On the other hand, psychology has a lot to say about the arrogance of psychopaths who assume that everybody else is less clever than they are, and how this is usually the factor that leads to their downfall.

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37427900)

Not that simple. Imagine that you see the losses of 100k, but are now almost powerless to stop the mirror losses of another 100k... which triggers losses in related stocks/options/futures. Getting an alert won't help. I am sure the alert type of system that you are thinking of exists in a far more sophisticated fashion, but in the end they are human decisions.

Understand that these are complex transactions (they are called Delta One) and where a computer can make a best choice, it has already done so a million times over. Its putting together high risk orders where you hedge the high losses so that your probability of landing in the high return area goes up. A computer can give you the options, but it can't make the decision because it doesn't see the difference mathematically between a high risk or medium risk transaction... the return for both is statistically the same.

As others have guessed, he probably landed on the wrong side of an option chain. Where it should have been "No", he clicked "Yes" and in transactions where losses are infinite and gains limited, that could be a big mistake. If anything the alert system probably told him the expected progression and the available avenues. If he was successful, he probably _limited_ the losses to 2 Billion. If he was not, his losses could have originally been a billion.

Re:You think? (1)

Slashdot Assistant (2336034) | about 3 years ago | (#37427908)

if (weeklyLosses >= allowanceForTheWeek)
{
cancelAllowanceForTrader("Kweku Adoboli")
awardYourselfBonus()
/*Bank management report occasional feelings of shame and a "hollow" sensation. Please review awardYourselfBonus to ensure it's compensating sufficiently for these feelings.*/
}

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37428204)

When I saw your nick I thought it was Slashdot Assassin. That would have been a much better name.

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37428022)

This algorithm would not have helped. It was not a cumulative loss that was build over time but it was a loss generated by a single transaction. The guy had gambled on the swiss frank going down against some other currency but the swiss frank went up and he lost this gigantic bet. Probably he had shorted on the swiss frank and by the day that he had to pay back the swiss franks that he had borrowed and sold, the 2 billion loss materialized in one single go.

Re:You think? (0)

Anonymous Coward | about 3 years ago | (#37428296)

The guy's a scape goat. A perfect one at that. He's black and from some obscure African nation.
He's got next to no chance of sympathy.

Plus, consider this.
UBS stated after the GFC that they were returning to traditional banking. They didn't fire anyone. Nor did anyone leave.
Investment banking is a completely different skillset to boring transactional banking. This guy, and everyone else in his team would be clueless for the most part about traditional banking.
It's like a casino telling their staff that they're no longer card dealers, but checkout clerks - because by the way, we're selling groceries now.

It doesn't happen. People don't stay if they've been commanded to do a far lesser job.

So, that means he was doing the job he was paid for. Which means he had implicit authorisation to do what he did, which means he's not a rogue trader, but a patsy.

Some sites speculate that he held a large position in CHF/EUR right when the SNB decided to devalue the frank. A 9% loss in 45 seconds. Impossible to predict, impossible to stop-loss out of, and impossible to do anything about. No IT system can detect this until it's too late. The big issue if this rumour is true, is who gives their traders 200,000 to play with?
(100:1 leverage = 200k down, 20,000,000,000. 20bn - 9% in 45 seconds = near enough to $2bn loss.)

If this is all true, this poor man was an unlucky spectator to the true definition of sovereign risk.

Control is what they want to avoid (0)

Anonymous Coward | about 3 years ago | (#37427844)

There are a lot possible technical and political measures to avoid risky behavior on the financial market. However, the capital companies, traders, brokers etc. work in a world with secrets. If you know them or you know the right one you can make a fortune. So secrecy is important and taking risks is important. And if you start to monitor them and block such behavior, the game would be over. That would be good for all of us, but bad for the financial crowd.
 

a rogue trader? (1)

FudRucker (866063) | about 3 years ago | (#37427860)

is that the term they use now for a scapegoat to use as an excuse for lax banking & investing policies?

100% accountability? I'm not that's what they want (3, Insightful)

SebZero (1051264) | about 3 years ago | (#37427886)

I think that such a rigid system would prove to be a double-edged sword and would ultimately not be adopted in some institutions. It requires precise tracking of what each trader "bets" vs their losses and the application of rules to stop them from losing too much. This is data that can find its way into the outside world in the case of scandals such as this and I'm not sure investment banks would want a perfectly documented account of losses becoming public. They play a game of high-stakes risk on a daily basis, under the respectable cover of expensive premises and thick financial service books.

A friend of mine who is in what most of us would call an extremely well-paying profession told me about a highschool friend of hers who worked as a trader in London and retired at the ripe old age of 42 to live in an amazing appartment with waterfront views in central London. I was grumbling about banker-types making phenomenal money and being nowhere near as intelligent as doctors/lawyers/engineers, to which she replied, "Of course they're not the brightest, they're certainly not dumb, but they're wired different to you or I - they're risk-takers. What they do with large sums of money on a daily basis, is gambling in a casino where 'the house always wins' isn't always the case. Normal people put in their position would not take the risks they take for fear of losing"

You can potentially win big, lose or stay the same - but some of these institutions trade retirement funds or government health funds. Governments tend to have inquiries if things go wrong and not having an exacty record of how a system broke down allows the bank face while they use the trader as the scapegoat for everything that went wrong.

no kidding..... (0)

Anonymous Coward | about 3 years ago | (#37427888)

The amount of leverage the trader was incurring in relation to his "funds" (whatever he had) must have been staggering....

I can't imagine how you would miss that. All financial alarms should have been going off much before that.

So maybe the trader actively evaded counter measures.

Re:no kidding..... (1)

Pinky's Brain (1158667) | about 3 years ago | (#37428088)

Everyone is over-leveraged at the moment except for the few ultra-rich who are pure creditors, it's the only way to keep up paper profits up while consumption and production are tanking ... of course there will be a reckoning unless the economy catches up, which it won't. The banks are all set up to fall in the near future ... the ultra-rich will mop up the collateral (they'll still lose a lot of money, but they'll end up owning a lot more m2 of land).

But that's the business model (0)

Anonymous Coward | about 3 years ago | (#37427890)

Gamble, gamble and gamble more.

Rogue trader = bad apple = bullsh*t.

Re:But that's the business model (1)

JustOK (667959) | about 3 years ago | (#37428050)

don't go bashing Apple for this!

No on can catch them when it matters (4, Interesting)

RobinEggs (1453925) | about 3 years ago | (#37427906)

I remember a highly compelling thought experiment published in the New York Times editorial page, back when the economy was first going south - a though experiment which, the authors later revealed, was more real-world practice than experiment.

The way big risks and 'trendy' trades often work is this: if a certain method of investing your pool looks good and other traders in the firm are making big money on it, you have two choices. You can go against the prevailing wisdom, but should you lose then you're the idiot who lost $10 million and you're fired. You can also go with the trend, in which case either you all win together or the entire company (or entire economy) goes down in flames and you're no worse off - in reputation or employment - than anybody else.

My point for bringing this up is that it's not about random idiots going nuts; even if that happens it's just one idiot or one company that dies, and at least they're all the 'rogue' idiots are effectively sociopathic, conflicting entities. The real damage comes when every trader agrees on things; sooner or later it's all coming down, and the rest of us go down with them.

So frankly I think it's *great* news that this guy lost $2 billion; at least it means UBS isn't so locked-down that individual traders can't take risks. Better they learn from giving traders too much freedom than we all learn from them being given or being taught too little.

Re:No on can catch them when it matters (1)

tukang (1209392) | about 3 years ago | (#37428152)

The fact that the guy lost $2 billion is not good in any way for UBS. You seem to be arguing that it's a good thing that this guy bet on a different direction but the direction is irrelevant, it's the magnitude that's astonishing. Traders are not allowed to put so much capital on the line, the fact that he was able to invest so much capital almost certainly means that fraud was involved. Kerviel, Leeson and others all forged papers or electronic records to perpetrate their fraud. The usual formula is they start with a bet, lose their capital, hide the losses, and double their bet. Rinse and repeat.

All banks have systems in place that are supposed to prevent this from happening. The fact that this guy was able to circumvent those systems shows that UBS does not have a good risk management system in place.

Re:No on can catch them when it matters (0)

Anonymous Coward | about 3 years ago | (#37428228)

There are many many transaction types, and chains where the upside is 10% and the down is infinity.

Re:No on can catch them when it matters (2)

garyebickford (222422) | about 3 years ago | (#37428882)

It was not good for UBS, but IMHO it was good for the system. This is an example of moral hazard in action - that principle that was violated by at least some of the US bank bailouts.

As for the size of the loss, forex trading tends to be very highly leveraged, so it's possible to have a hypothetical risk of 100 or more times the amount of a transaction - but with a very low probability of that risk occurring. The risk is not a single number but a probability density function (like a gaussian) with a very long tail (where the 'black swans' live). I presume that the bank's risk analysis system was not correctly recognizing the potential risk and requiring the appropriate hedge .

I certainly don't know the specifics of this incident, but black swan events are very difficult to quantify and it's a delicate balance between being overprotective (leaving money on the table) and being underprotective (leaving the bank vulnerable). A very small difference in the 'number' chosen can make a huge difference in the result. And to make things worse, that assumes that one has thought of and correctly judged the impact fanout of all the possible relevant risk factors - should an asteroid impact, or a large earthquake under London be included in the computation?

I've worked there... (0)

Anonymous Coward | about 3 years ago | (#37427910)

I worked at UBS/Warburg in '97 on the trading floor and back-office systems for equity derivatives, and I know that they do a nightly global risk assessment, so they know that if the company as a whole is out on a limb or if their positions balance each other within the limits they're required to keep. $2 billion is probably about as far as he could go into the hole in a single trading day.

/. states the obvious (0)

Anonymous Coward | about 3 years ago | (#37427954)

Of course IT could have caught the rogue trader. That is why IT is not this heavily involved on this level of the trade business.

why even let them exist (2)

Spy Handler (822350) | about 3 years ago | (#37427970)

the world was doing just fine without these "investment banks" gambling with billions of your money while dreaming up drivel like "mortgage-backed security derivatives"

I'd shut them all down and put the CEO and CFO and the rest of the O's, all of them, in prison.

Re:why even let them exist (1)

garyebickford (222422) | about 3 years ago | (#37428948)

When handled correctly, "mortgage-backed security derivatives" are economically equivalent to the title insurance required when you buy a house.

Your statement about C-level executives is exactly equivalent to someone saying "Those kids who listen to rap are all a bunch of murderers, cop-killers and junkie-thieves. We should put them all in prison." It's a facile, self-serving, 'classist' and ignorant statement.

Just as almost any demographic group, the vast, vast majority of C-levels are good hard-working folks who are really trying to do the best for their company, their investors, their customers and the public. You hear about the bad'uns, but they are a tiny minority - from my own experience I would argue a smaller percentage than in most other demographics. Folks who can't be trusted tend not to get promoted.

I've worked with a number of such folks at all levels from startups with five people to Fortune 500 companies. Most of them got where they because they worked well with others, maybe had some charisma, tended to make the best decisions given insufficient information (often it's not make the right decision, it's making a decision and making it become the right one by making a success of it), and the ability to instill confidence and optimism in the work force.

But just like auto drivers - the ones who drove home today without incident don't make the news - CEOs that just run good companies well are rarely in the news. The 1% or less who make the news are not typical.

"IT" could have caught? (0)

Anonymous Coward | about 3 years ago | (#37428086)

You know, when someone talks about computers, computer programs, network cables or the like as IT, I get the feeling that they are clueless about the stuff. Pretty much the same bunch that talks about the screen as the computer or holds a "computer driving licence".

It's embarrassing when Slashdot sinks so low that it sounds copied from a newspaper.

It's also too broad - just as silly as:
Science could have caught...
More money could have caught...
Police work could have caught...

Kweku Adoboli (0)

Anonymous Coward | about 3 years ago | (#37428144)

When I receive a mail from someone with a name like Kweku Adoboli I don't need to read it to know it is a scam.
Maybe the UBS bank should be similarly cautious.

Coming soon to a investment firm near you (1)

kuhnto (1904624) | about 3 years ago | (#37428150)

Music while on hold...

"Hello this is the IT department, what can I do for you today?"

"I need help FAST! I am trying to take advantage of the Facebook IPO, but my transaction is not going through the purchasing software!"

"I'm sorry to hear that, let me take a look on my end... OH, Ah, Oh, I see that your purchase amount is above the IT department's trading policy limit, so the order can not go through"

"THIS IS NOT ITS JOB TO DETERMINE THIS!! THIS NEEDS TO GO THROUGH IMMEDIATELY! TIME IS OF THE ESSENCE!!"

"According to policy C-1474, all transactions above $5000 will need to be put through IT's weekly security and trading meeting."
v "WHEN'S THAT!"

"Thursday."

"WHAT THE F***"!"

"Sorry for your frustration. I have started a problem ticket in the system... the ticket number is four, Seven, Three, Two, DEE as in Delta..."

Click

Don't believe what the official report is (2)

roman_mir (125474) | about 3 years ago | (#37428194)

The original report is most likely nonsense. [slashdot.org]

I don't believe that this was just what is reported.

Only if you want to catch them all the time (1)

tchdab1 (164848) | about 3 years ago | (#37428202)

Putting in place restrictions to prevent illegal trades will also catch those who are making money at it.
Funny how we only hear stories about illegal trades that result in huge losses - people are never prosecuted for successful illegal - excuse me, "unauthorized" - trading.

Controls are not just IT (1)

sjbe (173966) | about 3 years ago | (#37428234)

If American Express and Visa can mine transaction data and put a stop order on credit cards when you unexpectedly buy gas out of state, it seems like there could be patterns to watch for when the amounts are in the billions, too.

Apples to oranges in a lot of cases. Credit card transactions have huge volume, are fairly similar, and its relatively easy to see if someone is making a purchase that is unusual for them. There is a lot of data to compare against. Investment bankers sometimes do routine trades but they also invest in all sorts of complicated ways that aren't routine and that really can't be evaluated for statistical anomalies. Not to say they shouldn't use IT to track what they are doing but it is not nearly as easy as the glib summary makes it sound. There are lots of very effective controls used in the financial world that aren't based in IT.

That said, the real responsibility falls to management and especially to the risk management folks at the bank. It may not have been an IT problem but there still should have been controls in place to ensure this sort of thing doesn't happen.

Not Likely (0)

Anonymous Coward | about 3 years ago | (#37428242)

I know that in the US, UBS has outsourced most of their IT operations. In fact, a LOT of UBS IT jobs were offshored in the past 10 year. I know sysadmins, DBAs, and a large percentage of programming jobs were sent to india. I recently interviewed some IT people from UBS. They were applying for technical jobs, they seemed to have devolved into project managers. It led me to believe that UBS management had gotten rid of any technical people in the USA order to save a few bucks, and probably viewed technology as non-strategic.

I can't imagine that someone working for a third party IT company halfway around the planet from where the actual business is done is going to care that much, have any initiative/power to implement new technology, or even be that familiar with what the business actually does.

note to citibank fraud detection (1)

doug141 (863552) | about 3 years ago | (#37428250)

Buying gas out of state is not cause to decline a card when there's a big charge from U-Haul on the same account. In fact, that's probably the worst time to decide to start declining your customer's charges.

Risk control failure (1)

alexmin (938677) | about 3 years ago | (#37428332)

IT will not catch anyone. They do not have neither authority nor knowledge of applicable risk limits. Authority to control traders risks are granted to "risk managers" (duh!) This loss is an abject failure of a risk manager that was assigned to monitor the trades. Unless the trader cooked the books to hide what he was doing as in SocGen case of last year the risk manager deserves to be thrown out of his job with black mark and put in jail for long time.

Complex Financial Products- (0)

Anonymous Coward | about 3 years ago | (#37428352)

UBS hasn't told us what kind of trades this guy had on--It is very very unlikely that he was making equity trades retail investors and slashdot is familiar with. There is a lot of speculation based on the timing and the bank that he had a complex Vega(volatility) trade on the CHF/EUR cross that literally went to 0 when a policy decision pegged the currency.

Internal controls to prevent the Leeson style rogue trading are already in place. Controls for complex financial products also exist, but are orders of magnitude more difficult to implement. If the speculation is correct, identifying it algorithmically would require the IT department to have a much much deeper understanding of the products than they traders. If an individual in IT had such a sophisticated understanding of these products, he would be working as a trader not in controls.

Why didn't they catch.... (0)

Anonymous Coward | about 3 years ago | (#37428364)

.... the fact that they were gambling with the world's economy in 2008?

Really... what a great setup... if we loose OUR money, we all go ballistic.... but if we loose YOUR money.... too bad, so sad.

How to price complex issues (0)

Anonymous Coward | about 3 years ago | (#37428366)

It may seem like this is a rudimentary problem, and it is when you are trading things that have a known and agreed upon price (exchange-traded issues primarily), but when you start trading some of the more exotic stuff like derivatives, this is when the problems occur. The price that you mark-to-market at is pretty much just made up. Becomes pretty challenging to do risk management when the price that something is worth cannot be easily determined.

moH3 up (-1)

Anonymous Coward | about 3 years ago | (#37428444)

you. The tirelees That he documents

IT is busy with employee Blackberries and iPads (0)

Anonymous Coward | about 3 years ago | (#37428452)

Yeah, sure, I wish I had the resources to look into this "rogue trader detection program" idea of yours but my staff is busy handling complaints from the office staff that they can't get their Blackberries and iPads working with the corporate firewalls and VPN so they could update their Facebook status and stay up to date on celebrity Tweets.

Remember when you cut my budget and I had to toss out half my staff because you consider us a "cost center" and not a "profit center"? ONE TRADER costs you A BILLION DOLLARS and you had to cut MY budget of all places.

Follow the bonus (1)

sgt scrub (869860) | about 3 years ago | (#37428462)

Wake me when the IT department finds out which affiliate of the bank profited from the "rogue trader". This is becoming standard procedure. The "losses" get woosh'd to another branch, one guy takes the blame, a department gets threatened to be axed, and somebody on the executive rollodex gets a big_ass_bonus.

this is what outsourcing get's you people so far a (1)

Joe_Dragon (2206452) | about 3 years ago | (#37428506)

this is what outsourcing get's you people so far away from the what the company does or have so many levels of contractors / sub contractors that you get people who have no idea about stuff that are big for that company / site VS the standard IT outsourcing / contracting plan.

IT has (almost) nothing to do with this incident (1)

Anonymous Coward | about 3 years ago | (#37428584)

It pains me to see dozens of responses, many of which contain complete drivel.

It is clear that few of you have see the inside of a bank or any other large financial institution, much less being qualified to bitch about things you don't have a clue about.

From the news reports regarding this incident, and my limited knowledge of trade processes and IT, I would surmise the following.

The trader was able to hide his illicit activities since 2008, as:

1. His trades were booked on disparate trade entry systems, of which many are only synced after business hours to the accounting/central system for overnight processing. This is how accounting breaks occur, and it is no simple matter to reconcile them. Talk to you friendly neighborhood finance reporting guy (no, not the accountants, i mean the reporting specialists) to get a clue.

      Many products do not even have an updated price available as a data feed (you pick the phone and dial the counter party when you want an updated price).

    You can only monitor trades which have been entered on to the system. Do you know that some species of trades can be booked and settled overnight and are only entered on to the system the next morning?

    How the hell do you calculate exposure on these things, geniuses? You're gonna check on the trade blotters which the scheming trader will not update accurately?

    How do you know when you have breached the daily trading limits on a real-time basis, when today's executed trades don't appear on to the database until tomorrow?

2. The internal and external auditors were sleeping on the job. Someone from one of the Big 3 firms fucked up here, no doubt. And no surprise too, most audits are worth shit.

3. The risk managers are mostly harmless -- they are not traders and haven't got a clue on the actual trade processes, hence all their fancy risk monitoring is worth shit.

        You need in-depth know-how on the intangible processes (trade entries, accounting entries) and the tangible processes (who reconciles the broker confirmation faxed from Antartica at 3am against the trade blotters from the previous afternoon? And how quickly and accurately can they do it?) to even begin to manage trading risk.

The aforementioned are deep underlying causes which will require a complete overhaul of the way trades are done worldwide.

Remember, you can only properly monitor what you can properly measure.

IT folks, get over yourselves -- you have no idea what a nest of worms banking is. Stop thinking the world revolves around you.

Conjectures (0)

Anonymous Coward | about 3 years ago | (#37428696)

We don't really know what happened to caused the problem; for all we know he was supposed to hedge the bank's CHF liability and didn't fully do so thinking that the franc wouldn't move 10% in an afternoon.

The amount of money isn't really that large for the bank that size anyway.

Until we find out some real details I am going to amuse myself by reading the comments of a bunch of people who have neither worked on a trading desk nor with risk management systems all of whom assume they know what happened and have a solution.

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