What is Rogue Trading

What is Rogue Trading?

A Rogue Trader is a trader who behaves recklessly and independently of others, frequently harming the trader’s employer and maybe clients. Rogue traders often engage in high-risk investments resulting in massive losses or winnings. On the other hand, Rogue traders are only identified if they lose, creating incentives for moral hazard. If their trades are incredibly profitable, no one considers them “rogue”, and they are more likely to win a large bonus. Yet, if their risky bets lose, they are rogue and can cost the company millions or even billions of dollars in losses.

Example of Rogue Trading:

Rogue trading often occurs because of deficiencies or flaws in an organisation’s risk governance, processes, supporting technologies and culture. One example of Rogue Trading in Barings Bank is when a trader, Nick Leeson, went to Rogue and started speculative trades resulting in massive losses and, ultimately, the closure of the Bank.

Why is Rogue Trading important?

According to industry insiders, while traders are used to taking risks within established boundaries, moving on to rogue or unauthorised behaviour is likely the result of greed, panic, and pride. Risk professionals should keep firm limits and systems and keep rogue trading in sight while building risk limits.