Could a trader crash your bank?

Trading floors have changed dramatically since the crisis, but some traders will always push the boundaries. Brian Caplen asks: is your bank restraining or promoting them?

A lot has changed on trading floors since the crisis. Compliance is a top priority rather than a box-ticking exercise, risk managers are empowered and back in charge, bonuses are in the form of shares that vest rather than cash, and the new core values are posted everywhere.

But culture is transactional so even with all this in place there is no certainty of a different kind of behaviour. There are forces pushing traders in different directions.

It is wrong to believe that for traders everything is about personal enrichment. They are part of a team and delivering big profits makes them heroes to their colleagues and managers. They are competitive so winning is important, not only within their own bank but on the wider street.

A deferred bonus scheme is no guarantee that problems will not arise. Traders have other motivations. Sailing close to the wind in terms of risk and regulation was typically how traders earned a reputation. These risk takers are also the ones likely to be spotted by their managers and promoted even if they lack management skills. It is easy to see a very unvirtuous circle developing.

Have the new rules changed things that much? The pressure to make money is greater than ever. Some traders must be tempted to push the boundaries.

The classic way a trader gets into trouble is by losing money and then trying to make it back by, first, holding or hiding a loss-making position and, second​, by doubling up. To do this they break limits but may only get discovered when the trade moves further against them. By this time the losses can be life-threatening for the bank.

This has been the trader’s fatal flaw for centuries. It is absurd to believe that it will not re-occur, whatever compliance and risk management procedures are in place.

So what should the worried CEO do? Part of the new culture must be that recognition and promotion are based on factors other than just profits (owning up to mistakes, for example) as well as the encouragement of whistleblowing.

In many firms, whistleblowers still face an arduous journey in getting a proper hearing without reprisals. They are advised to go in pairs so that when things get heavy later they each have a witness. But they could save both the bank and the CEO’s job. Make sure your door is open to them.

Brian Caplen is the editor of The Banker