A rogue trader is a financial institution employee who begins acting independently without authorization or approval from his or her employer. The rogue trader engages in unlicensed transactions, frequently in a risky manner. Rogue traders can cause significant losses for the companies they work for. The most famous example occurred in 1995, when trader Nick Lesson single-handedly bankrupted the venerable Barings Bank through Nikkei index futures speculation.
The decision to become a rogue trader is driven by a variety of factors. Some people who have written and spoken about their experiences as rogue traders describe a slippery slope that began with small unauthorized transactions and gradually grew into larger and larger transactions until the trader lost control. Some people also felt vindicated because they felt confident in the trades they were making, with a sense that they were outsmarting their bosses by making better trades than the boss would have authorized.
The risks to the employer increase as a rogue trader gains confidence and aggression in conducting unauthorized trades. Employers may suffer significant losses as a result of trades made without their knowledge or approval, and these losses can occur quickly due to market volatility. Rogue traders also have a growing disregard for the money they are supposed to be stewarding for their employers and clients, and they may also act recklessly in regard to their own commissions and future.
On the trading floor, aggressive, can-do attitudes are encouraged. When hiring new employees, financial institutions often look for people who have these characteristics, because people who aren’t confident have a hard time closing deals. Unfortunately, this tends to attract people who are also at risk of becoming rogue traders, as an employee’s confidence on the floor grows, and they can fall into the trap of believing it is impossible to make a mistake.
Rogue traders face a variety of penalties. When a trader is publicly investigated and exposed, he or she may face prison time. If a company can catch a rogue trader before significant damage is done, rather than launching a public investigation, it may choose to fire the employee. Rogue traders tend to make their parent companies look bad, and financial institutions are very sensitive to their reputations and the reputation of the market in general.