Friday, February 29, 2008

Another Rogue Trader: Where is the risk control?

A trader at MF Global caused $142M in losses on “unauthorized wheat trades”. Once again the market is faced with a situation that leaves the majority of the population wondering if any of these firms have even basic risk control measures in place.

Most decent programmers could implement an algorithm that defines financial limits for each individual trader within a firm in less than two days. Creating a financial control system that can not be bypassed is not rocket science. The only conclusion we can be left with is that the majority of these firms actively support traders in pursuing their greed….until they blow up. At this point they become “rogue traders” and their positions “unauthorized”.

Trader at MF Global Rang Up $142M Loss
Rogue Trader at MF Global Rang Up About $142 Million in Losses on Unauthorized Wheat Trades

‘It discovered Evan Dooley, a trader at the company's Memphis, Tenn., branch, trading wheat contracts in amounts that exceeded how much he was allowed to trade.’

He bought as many as 15,000 wheat futures, the equivalent of about 10 percent of the market for these contracts for any given month. In any type of functioning risk control environment this type of order should set alarm bells ringing very quickly. The concept that MF Global only discovered the trades early Wednesday morning and then ran up the losses as it desperately unwound the positions, should make everyone question if the situation is "a mere aberration in our risk control" or a more systemic institutional problem.