IT Could Have Caught $2 Billion Rogue Trader

superapecommando writes "With the benefit of hindsight, IT experts are claiming that technical countermeasures at Swiss bank UBS could have stopped rogue trader Kweku Adoboli running up a $2 billion loss." If American Express and Visa can mine transaction data and put a stop order on credit cards when you unexpectedly buy gas out of state, it seems like there could be patterns to watch for when the amounts are in the billions, too.

Sure...

[Anonymous Coward]

... but said IT is the department that get's downsized on every occation; it only costs money and add's no value, rrrrrrrrrrrrrrright?

lack of liability

[azalin]

In my humble opinion the attitude in the finance sector has to change away from gambling and back to investing.
Btw. How comes those people only get bonuses and not fines to?

No on can catch them when it matters

[RobinEggs]

I remember a highly compelling thought experiment published in the New York Times editorial page, back when the economy was first going south - a though experiment which, the authors later revealed, was more real-world practice than experiment.

The way big risks and 'trendy' trades often work is this: if a certain method of investing your pool looks good and other traders in the firm are making big money on it, you have two choices. You can go against the prevailing wisdom, but should you lose then you're the idiot who lost $10 million and you're fired. You can also go with the trend, in which case either you all win together or the entire company (or entire economy) goes down in flames and you're no worse off - in reputation or employment - than anybody else.

My point for bringing this up is that it's not about random idiots going nuts; even if that happens it's just one idiot or one company that dies, and at least they're all the 'rogue' idiots are effectively sociopathic, conflicting entities. The real damage comes when every trader agrees on things; sooner or later it's all coming down, and the rest of us go down with them.

So frankly I think it's *great* news that this guy lost $2 billion; at least it means UBS isn't so locked-down that individual traders can't take risks. Better they learn from giving traders too much freedom than we all learn from them being given or being taught too little.

Re:You think?

[NoOneInParticular]

I'm arguing against people equating risk with sigma, and in particular those who say that there's a problem predicting 23 sigma moves, as if that's saying something about the likelihood of the event occuring. I'm also arguing against the financial sector who is still using sigma (and beta, and the entire apparatus of mutlivariate statistics) as something that can be used in practice. You are arguing that the financial sector has moved on, but have they? Are they truly beyond the Gaussian assumption, have they really moved away from Value at Risk models, is Black-Scholes truly abandoned, are standard risk-of-ruin calculations abandoned, or are they still trying to fix Gaussian models with martingale and jump dynamics as they were doing last time I looked into it. What has replaced the entire apparatus that wreaked havoc 5 years ago? I still see bailouts on the horizon, banks very highly leveraged, and a sector that has reasoned away risk using the same flawed arguments that have been en vogue for the past 40-50 years.

You are seriously arguing that this has changed? I've worked at hedge funds, I am working in risk management, the assumption of normality is the only game in town. And yes, I am arguing that all those extremely smart mathematicians and physicists are missing the obvious, simply because they are doing what they were hired for: to create models. Stating that we don't have the mathematics to do the job will not land you a position as a quant. They'll hire someone that will try the best they can: steer a car by rearview mirror, driving in the ravine at the next haircut. All we do is drive a little less fast.

I guess that on the trade floor there might be a few that get it and are using algorithms that do assume that they can lose everything at any time and for instance only trade in options, but at the macro level, capital requirements are still stated in risk weighted assets. Options are still being sold. Individuals and banks are still going naked (leveraged) long. Risk is still assumed to be log-normal. Textbooks are still printed stating this as a fact (not as an assumption). Have you seen a shift in teaching economics, away from multivariate stats? No, as nothing has changed.