It is like making hay while the sun shines – only that sunset brings sudden darkness. Rogue traders like Nick Leeson, who brought down the venerable Barings and Ketan Parekh, who caused a market crisis in 2001, are among the several figures of dubious repute who often bring bull runs to a painful pause- if not halt.
In the summer of 1992, a brokers’ strike exposed Harshad Mehta, a small-time Mumbai broker who manipulated bank funds to divert cash to fuel a speculative binge. He got trapped when he could not sell shares to pay back the banks from where he had taken the money.
Memories of all that came back on Thursday when French giant Societe Generale unveiled a $7.1 billion fraud by a rogue trader yet to be named in a somewhat familiar manner.
Soc-Gen chairman Daniel Boulton said in a letter to clients: “The transactions which involved the fraud were simple — taking a position on shares rising — but hidden using extremely sophisticated and varied techniques.” Three months back, mid-sized firm Hexaware Technologies sacked a senior official in its finance department for indulging in fraudulent treasury transactions.
Why does this happen in a bull market? “It is the lack of good risk management techniques that create this kind of situation,”’says Nimesh Kampani, chairman of Mumbai-based JM Financial. Industry sources said that it is the performance-driven culture in a bull market that triggers frauds. “Traders have a tendency to ignore guidelines to meet performance standards,” said the CEO of a Mumbai-based insurance company.
In simple language, traders throw caution and prudence to the winds in the race to make quick buck – although there are books and courses on risk management that they ought to remember or follow. When a scam happens, companies try to put in stricter guidelines. Banks and brokerage firms across the globe had tightened compliance procedures and enforcing limits for their traders after Barings was hit by the Leeson fraud.