Avivah LitanExecutives at many U.S. and global financial institutions are pounding on their risk managers to make sure they are not the next victim of a UBS-style rogue trading multi-billion dollar fiasco. Of course, many of the vendors engaged in data mining, analytics, and fraud prevention have taken notice and are pitching their wares to these stressed risk managers.
Essentially, most of the vendors are proposing to use pattern based intelligence based on entity link analysis to find anomalous trades and aberrant trader activity. To do that, they need to baseline and profile trader, desk and counterparty activities. No small task and one that frankly I don’t believe can be successfully done. There is no baseline profile for a good trader, where success requires innovative trades based on volatile, dynamic, and unpredictable market movements that we have come to see all too frequently. Plus, enormous amounts of information and data needs to be culled, sifted and analyzed, and only a highly experienced trader would have a clue of what to look for, assuming the vast data sets were integrated and “minable”.
Instead, good old fashion controls seem to be in order here. And some standardization used across financial institutions would certainly help.
My limited understanding is that there are essentially two types of trades that need to be monitored – OTC (over the counter) that are executed with counterparties and listed trades thare are executed on internal accounts. With listed trades, the control desks need to confirm that there are assets or securities in the accounts reflecting those trades (a control that should catch fake trades done internally, which I think was the problem with most of the rogue trading scandals that have cost some banks billions of dollars in losses). With OTC trades, it’s a bit more complicated because the trades need to also be confirmed with the external counterparty but that can be done using standard electronic formats such as SwapsWire that is now used in limited fashion.
Sometimes, in fact often times, the best solutions are also the simplest to implement and make the most common sense, even at opaque financial institutions that specialize in complexity.
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