NEW YORK -- The big-bets-gone-bad era of rogue trading was supposed to be a thing of the past, thanks to stifling new rules imposed by regulators in recent years and computers designed to keep an eye on traders' moves and flag activity deemed too risky before painful losses occur.
But a $2 billion loss blamed on "unauthorized trading" by a London-based trader at the investment banking unit at UBS, a Swiss-bank, reported on Thursday, is proof that rogue traders are not yet extinct.
The latest episode of a rogue trader operating outside the boundaries imposed by a financial firm reignited a debate in financial circles as to why risk-control mechanisms keep failing at major banks around the globe.
"There will be a lot of questions that have to be answered at UBS," says Chicago-based securities lawyer Andrew Stoltmann.
The size of the loss and the role of an alleged rogue trader was reminiscent of other high-profile scandals involving traders that pushed the risk envelope too far, including Societe Generale's Jerome Kerviel, who concealed unauthorized trades in 2008 that resulted in more than $6.5 billion in losses. Other bad boys of trading, include Brian Hunter, whose failed bets on natural gas in 2006 triggered $6.6 billion in losses at Amaranth Advisors, and Nick Leeson, best known for causing the collapse of Barings Bank after racking up losses of more than $1 billion in 1995.
UBS said it discovered the massive loss, one of the largest of its kind, late Wednesday.
In a note to its employees Thursday the bank said the losses did not involve client money and that it "was trying to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened."
UBS shares plunged 10% to $11.41.
The alleged trader responsible for the massive loss, which UBS says could result in a loss in the third quarter, is 31-year-old Kweku Adoboli, according to the Associated Press. UBS would not confirm Adoboli as the rogue trader
Adoboli worked at a stock trading desk dubbed Delta One, according to his profile on LinkedIn, and an online business networking site. prior to that he worked as a trade support analyst after attending the University of Nottingham. According to his profile, he was also involved in trading exchange traded funds, which are baskets of stocks or other assets that trade like stocks.
John Bates, chief technology officer at Progress Software, which develops trading risk programs, speculates that UBS failed to watch its rogue trader's positions in real time.
"There was not adequate risk and surveillance techniques in place," he says. "Any trades operating outside his allowed risk parameters should have been detected in real time and reported to the appropriate risk manager.
Dominic Auld, a lawyer at Labaton Sucharow, notes that rogue traders are only defined as such when they lose money — not when they make it. "They are only rogues on the downside," says Auld. "If he had made $2 billion on the upside he would be a genius."