If you're sitting there doing a crossword and you put the paper on the key, boof-boof-boof-boof, it can go right off ... You can just keep trading

Making money makes reputations at investment banks, but the numberless ways in which high-profile traders can lose eye-popping sums is making the case for much sharper focus on the unglamorous role of the risk control units.
Despite a regular crop of scandals and errors, from unauthorised positions to "fat-fingered" trades, there is insufficient investment in systems to monitor traders and prevent unacceptable losses, said Giles Nelson, co-founder of trading technology provider Progress Apama.
"If you look at surveillance of trading behaviour, it's somewhat seen as a Cinderella," said Nelson.
"The real focus is on the exciting stuff, on making money, making deals ... That's where the investment in technology is."
Yet the same traders can also lose a bank billions of dollars by circumventing the rules.
Trading limits can be broken or errors hidden as unloved risk managers, often equipped with inadequate technology, struggle to impose controls on risk-loving traders.
Unauthorised and undetected trading by a junior trader at Societe Generale earlier this year cost the French bank as much as 4.9 billion euros ($7.69 billion).
A common mistake is to misprice products or deals, either deliberately, or due to a lack of liquidity or market data, or by the inadvertent typing of an extra zero.
Just last week Canada's Toronto-Dominion Bank took a $90 million hit when a trader mispriced financial derivatives, while in June, Wall Street bank Morgan Stanley suspended a London-based credit trader who had overvalued positions by $120 million.
In May, Lehman Brothers suspended two London equities traders after identifying a similar problem.
THE ALPHA TRADER
The problem, said Nelson, is partly because banks are wary of imposing too many controls on traders and so stifling innovation or prompting them to walk to more lax competitors.
It is also very difficult to challenge the processes of a division that is a major revenue earner, said Brian Sentance, chief executive of Xenomorph, supplier of data management technologies.
Existing safeguards struggle to keep up with the evolution of financial products and transactions and the proliferation of trading venues, and are often run on a series of independent spreadsheets or databases, which inevitably makes a bank vulnerable to errors or malfeasance.
Sentance said some of his clients were already updating their risk systems. But banks still need to give risk managers greater power and invest more heavily in data and risk management technologies and procedures, Nelson said.
"(Banks realise that) if we don't, then not only are we going to suffer reputationally and the regulators will come down harder on us, but we will lose significant amounts of money eventually," Nelson said.
But some circumstances might always prove difficult to guard against.
"If you're sitting there doing a crossword and you put the paper on the key, boof-boof-boof-boof, it can go right off ... You can just keep trading and trading and trading," said one London-based trader