Unauthorized traders act independently without approval from their employer, leading to significant losses. Motivations vary, but some justify their actions as outperforming their employer. Aggressive attitudes on trading floors can encourage rogue trading. Penalties vary, including jail time and termination.
An unauthorized trader is an employee of a financial institution who begins to act independently without authorization or approval from the employing institution. The dishonest trader carries out transactions that are not authorized, usually recklessly. Dishonest traders can lead to significant losses for their employing institutions. Perhaps the most notable example occurred in 1995, when trader Nick Lesson single-handedly bankrupted the venerable Barings Bank by engaging in speculation in Nikkei index futures.
The motivations behind the decision to become a rogue trader vary. Some people who have written and spoken about their experiences as dishonest traders describe a slippery slope that started with small unauthorized businesses that gradually grew into bigger and bigger businesses and grew into something the trader could no longer control. Some also described a sense of justification in feeling good about the business they were doing, with an element of feeling as if they were outperforming their employers, doing better business than the employer would have authorized.
As a dishonest trader becomes more confident and aggressive in carrying out unauthorized trades, the risks to the employer increase. Employers can suffer substantial losses as a result of trades taken without their knowledge or approval, and as markets can be extremely volatile, these losses can occur very quickly. Dishonest traders also tend to act with increasing disregard for the money they should be managing for their employers and customers, and they may behave recklessly with regard to their own commissions and the future.
Aggressive “do” attitudes are encouraged on the trading floor. When looking for employees, financial institutions often specifically look for people with these characteristics, because people are not confident that they will have a hard time doing business. Unfortunately, this tends to select people who are also at risk of becoming dishonest traders, as an employee becomes increasingly confident working on the floor and can fall into the trap of thinking slipping is impossible.
Penalties for dishonest traders vary. When a trader is publicly investigated and expelled, jail time can be the result. If a company can catch a dishonest trader before substantial damage is done, it may choose to fire the employee rather than launch a public investigation. Financial institutions are very sensitive to their reputations and the reputation of the market in general and dishonest traders tend to make their parent companies look bad.
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