Accounting for Greed: Unraveling the Rogue Trader Mystery
UVA Law Faculty Affiliations
In this article, I analyze the motivations underlying the actions of "rogue traders" - market professionals who engage in unauthorized purchases or sales of securities, commodities or derivatives, often for a financial institution's proprietary trading account - and the motivations of the managers or supervisors who are assigned to oversee such traders. After beginning with the observation that rogue trading incidents are neither new nor isolated events, I argue that the continued existence of pervasive rogue trading has remained a mystery for industry observers, particularly given both the extensive legal regime and formal institutional policies apparently designed to curb such behavior. If firms are comprised of rational wealth maximizers who, by definition, behave in a manner that enhances their own self-interest, then why do managers and employee-traders engage in conduct that jeopardizes not only the continued existence of the firm, but also jeopardizes the integrity of the markets in which the firm operates?
Drawing on insights from the fields of psychology and social norms, I argue that most commentators have underestimated the benefits of rogue trading to traders, managers, and, arguably, shareholders. Furthermore, commentators have underestimated the costs to managers and shareholders of curbing rogue trading. Accordingly, a cost-benefit analysis indicates that financial institution management has made a conscious decision to foster an institutional culture that tolerates at least some rogue trading. Consequently, contrary to the conclusions of most other legal scholars, I conclude that market forces cannot be expected to eliminate rogue trading, because eliminating the conditions that give rise to rogue trading is not in the best interest of traders, managers, or, perhaps, of shareholders.