Governance
What do you do with a drunken trader? |
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| Governance | |
| Written by Dr John Bates, CTO of Progress Software | |
| Friday, 02 July 2010 | |
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The broker, after a few days of heavy drinking, took on a seven million barrel long position on crude oil.
The news that Steven Perkins, former oil futures broker in the London office of PVM Oil Futures, has been fined £72,000 by the FSA and banned for five years from working in the industry led to huge headlines but could be just the tip of the iceberg. The fine seems miniscule since it cost PVM somewhere in the vicinity of $10 million - after unwinding the $500 million-plus position. However, perhaps the most surprising thing about this incident is that it happened at all. After all, Perkins was a broker, not a trader. Therefore by definition, he acted on behalf of traders, placing orders on the Intercontinental Stock Exchange among other places. The fact that he could go into the trading system and sneak through seven million barrels without a customer on the other side is unbelievable and completely unethical. Heavy drinking is practically a job requirement in the oil industry, or so my sources tell me. Therefore, this kind of thing could be a real issue going forward. As algorithmic trading, using computer software to enter trade orders, takes hold in the energy markets, trading may approach the ultra-high speeds seen in equities markets. Without proper technology controls in place, this is a recipe for super high-speed disaster, especially if there were a way for the broker or trader in question to enrich himself in the process. It’s simply the ‘greed is good culture’ at it’s toxic best. One powerful way to prevent this kind of accident or fraud is through the use of stringent pre-trade risk controls. The benefits of being able to pro-actively monitor trades include catching "fat-fingered" errors, preventing trading limits from being breached, and even warning brokers and regulators of potential fraud - all of which cost brokers, traders and regulators substantial amounts of money. PVM is a good example of this. Ultra-low-latency pre-trade risk management can be achieved by brokers without compromising speed of access. One solution is a low-latency "risk firewall" utilising complex event processing as its core, which can be benchmarked in the low microseconds. Errors can be caught in real-time, before they can reach the exchange, heaving that drunken trader right overboard, and his trades into the dustbin. One thing’s for certain: the drunken trader story is not the first and certainly won’t be the last scandal to rise to the surface. A sobering thought is just how many more cases will come to light before the industry wakes up to the importance of real-time market surveillance software that monitors all trading activity and detects instances of market abuse.
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