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Rogue-Proofing Your Fund

How can buy-side firms stop rogue traders before they go too rogue? The good news: Rogues can be found but the bad news is no one can ignore the problem any longer.

Advanced Trading: Could the pre-trade risk tools inside an order management system (OMS) or an execution management system (EMS) stop a rogue trader? Can it spot an equities trader making an unallowed FX trade, for example?

Thomas Kim, CEO of UNX: The solution does not lie within one tool or provider; the variations of what could go wrong are too wide. As such, the solution actually rests in the ability to bring all the various tools that are important to a firm together where the trades are taking place -- the execution management system (EMS).

For example, the Catalyst platform is an EMS with pre-trade parameters, and it also provides a software development kit (SDK) to integrate freely or build additional measures that can notify immediately both the trader and the risk manager all within one platform.

So with the right sequence of tools that are able to listen to each other and keep the trader and risk manager informed in real time, firms are better equipped to manage these types of risks.

Advanced Trading: The UBS rogue trader was rogue for month until he turned himself in to UBS execs. How could this happen? How can firms get a better risk picture inside their own firms?

Kim: It's tough to know how everything transpired from the outside, but this is a perfect example of what I just referred to. It wouldn't surprise me if this particular situation was an inadvertent scenario that just spiraled out of control.

There are parameters and limits that can be imposed to help alert and, if necessary, stop trading. The EMS can be used as a gateway to establish specific rules for each desk and/or each trader. Not to over simplify the problem or solution, but it's mainly a matter of pulling all the pieces together and setting the limitations appropriately.

  • The Old School Rogue Trader
    As UBS reels from news of a trader gone rogue, we remember this isn't the first time a trader has gone off the rails. Advanced Trading interviewed Nick Leeson in 2008. Here's how he almost got away with it and what has changed since his forays in the 1990s -- and what has not.
  • How to Spot a Rogue Trader
    Advanced Trading spoke with James Heinzman, managing director of Global Compliance Solutions, to discuss how firms can better detect rogue traders.
Advanced Trading: Does the buy side need to worry about a rogue trader?

Kim: Everyone needs to worry about a rogue trader. It may be for different end reasons, but it is a problem for everyone.

Advanced Trading: Why is risk still an issue in this day and age of high-speed computers and powerful tools?

Kim: Risk is more an issue today than ever. As electronic trading continues to evolve and new products are constantly being made available, traders and technologists are closer to charting dangerous territory. This is why risk tools and trading tools need to work together.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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