“I Have An Error”

The trading desk I used to work on dealt with size.  If we screwed something up – like sent an order down “market” instead of “market on close” or executed a trade the wrong way (sell vs buy – yes – it happens), or accidentally sent our entire inventory to the floor to execute instead of a 1% slice of our inventory, well then, the consequences could be dire.

The cardinal rule was that if you had an error, you brought it to everyone’s attention IMMEDIATELY.  We can fix errors, take a small loss, and move on.  So one of the younger guys on my trading desk had a small error one day, and he did the right thing: he actually stood up, raised his hands, and announced loudly “I HAVE AN ERROR.”  It was actually funny in a way – that he didn’t pull my boss aside – he just yelled it out – but it was the right thing to do.  To this day, my former boss still quotes this kid, imitating his voice when he announced to the trading floor that he had an error.  We can laugh about it because the guy did the right thing, fixed it, and there was no damage.

There was another guy who screwed up an order for an international client and tried to hide it.  We discovered the problem the next day, and the guy’s career on the trading desk was over.

You cannot finagle your way out of an error, hope that it will go away, or cover it up.  It always gets discovered eventually.  Unless you work for UBS, apparently.

Today’s most amazing news story, courtesy of the BBC, is that “rogue trader” Kweku Adoboli’s trading losses were never discovered by UBS:

“I have learned that UBS’s internal controls did not pick up the massive loss allegedly generated by its trader Kweku Adoboli.

The course of events was that on Wednesday Mr Adoboli disclosed to UBS that he had engaged in unauthorised trades, in his role as part of UBS’s so-called Delta One trading team, which deals in exchange traded funds (or tradable investment funds whose proliferation has concerned regulators).

UBS then examined his trading positions and rapidly informed the Financial Services Authority and the police. Mr Adoboli was arrested by the police at 3.30am yesterday.

The disclosure that it was Mr Adoboli’s decision to inform his colleagues of his actions that set alarm bells ringing at UBS, rather than its own monitoring system, will add to concerns that investment banks simply aren’t capable of controlling the huge risks that their traders take.”

Now, we still don’t know the nature of the trades that generated the losses, but the point is that $UBS absolutely positively MUST be able to detect them at some point – regardless of if they are erroneous or not.  That “point” at which UBS should know about the trades should come way before they reach $ 2B in losses.

-KD

related: “Losing $ 2B Without Anyone Knowing Is Much Harder Than You Think”

 

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