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Rogue Trader Arrested, Costs UBS $2B

After a year of restructuring and severe layoffs -- 3,500 by most media reckonings -- UBS found itself in some very unflattering headlines this morning. A 31-year old equity trader was arrested by City of London police for going rogue to the tune of $2 billion.

On the three-year anniversary of the collapse of Lehman Brothers, this is the last piece of news the struggling Swiss bank needed.

According to media reports the suspect -- Kweku Adoboli -- was caught for being short on an FX trade. UBS officials notified the FSA in London and Adoboli was arrested "suspicion of fraud by abuse of position" at 3am this morning in the City of London.

UBS officials released this statement to the media early this morning:

UBS has discovered a loss due to unauthorized trading by a trader in its Investment Bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of USD 2 billion. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.

As can be expected, shares in UBS are down at press time.

The Need for Risk Tools

Of course it wouldn't be a financial crisis without vendors calling for greater transparency -- and an upgrade of bank's risk tools.

"It's very worrying that such rogue trading can still occur, after all the high profile incidents of recent years. Clearly strong questions will need to be asked of UBS's risk controls and processes. Internal risk controls are not something that a financial firm can take for granted or leave to run unchecked; detection of criminal fraud or market abuse is something that must happen in real-time before any unauthorized trading has a chance to lose a firm money or move the market," says Dr. Richard Bentley, industry vice-president, banking & capital markets for Progress Software.

Bentley continues: "Pre-trade risk management is paramount, with trading limits specified and checked in real-time, while internal controls should also be monitored for possible manipulation, again in real-time. The good news is that technology does exist in the form of real-time transaction monitoring and surveillance solutions that analyze data transactions in flight.

Financial institutions need to start looking inward to improve standards, over and above the demands of current regulation. Otherwise the incessant drive for profit will only serve to encourage more losses on the scale of those suffered by UBS today."

How Was He Caught?

I once interviewed the chief technology officer at a tier two investment firm and asked him how technology helped find rogue traders. He said they can help but "A rogue trader will stay rogue until he or she is caught."

The Guardian, which loves a big banking scandal, sheds some light on how the alleged rogue trader at UBS was found out:

Louise Cooper, analyst at BGC Partners, said the losses are rumoured to relate to a Swiss franc trade that went wrong after the Swiss National Bank intervened to lower the currency. On 6 September, SNB warned that it would no longer allow one Swiss franc to be worth more than 0.83 Euros -- equivalent to 1.20 Swiss Francs to the euro.

"The Swiss currency moved by 8 percent straight away which is a huge move for FX [foreign exchange] markets. Probably a good guess as to where the loss came from, but at the moment we do not know," she said.

How Bad Are Things at UBS?

Bad. So says the NY Times Dealbook:

Earnings at the financial firm fell to 1 billion francs in the latest quarter, from 2 billion francs in the period a year earlier. In a move to cut costs, the bank announced in late August that it would eliminate 3,500 jobs, with 45 percent coming from the investment banking unit.

Stay tuned to Advanced Trading for more details and commentary. 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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