It has been a couple of turbulent years, with financial markets making headlines for all the wrong reasons: in 2012 UBSs Kweku Adoboli was imprisoned for seven years having racked up a $2.3 billion loss by amassing more than $8 billion in unauthorised equity index futures positions (and hiding them with fake hedges), while a group of London-based traders were caught colluding to fix the London InterBank Offered Rate (Libor).
And still it seems the financial markets appear to have learned little from these past mistakes: JPMorgan has been fined $920 million after traders in its chief investment office in London were found to have priced a derivatives portfolio to reduce reported losses of about $6.2 billion, and another group of traders have been accused of persistently colluding to fix the price of currencies during the 4pm London Fix.
Is anything changing in markets systems, processes, even psychology to minimize this type of market abuse, either by individuals or by institutions?
In truth, says Philip Lieberman, president and CEO of privileged identity management and security software firm Lieberman Software in Los Angeles, every single system that the financial industry needs to combat rogue trading and/or wider market abuses is already available, and has been for some considerable time.
The reason why none of these have been utilised effectively, he adds, is because of a basic calculation done by trading organisations around the world: subtract the fines from rogue trading activities from the costs of putting in all of the necessary systems.
Indeed, it is apposite to note that some two years before Adoboli wreaked havoc on the bank, UBS was fined a record £8 million by the UK Financial Services Authority (FSA) for a string of systems and controls failures that allowed employees in its wealth management division to carry out unauthorised trades on 39 client accounts between January 2006 and December 2007.
The costs to banks of total control, however, could be prohibitive: any re-alignment of its internal security and compliance systems would require a complete strip-down and rebuilding of all systems at all operational levels across the board and around the globe.
Yet such measures would add up to less than 0.01% of an average banks revenue for a year, says Martin Porter, director of sales at b-next, a market abuse surveillance, insider dealing and compliance software solutions company in London.
Although the top-line cost of the fines to many big banks may be moderate compared to broad market capitalization, the corollary costs associated with such regulatory censures are likely to be much greater, says Jeremy Stretch, head of currency strategy for CIBC in London.
A bank could be faced with issues associated with altering systems and procedures, perhaps, together with extra management costs; all of these micro-risks might have a much bigger macro-fallout, he adds.
The level of disruption, adds Lieberman, is particularly acute for the many banks that have grown in the last decade through mergers and acquisition a textbook example being Salomon Brothers hooking up with Smith Barney, which was then subsumed into Citigroup after it had merged with Travelers Group.
There are many cases where one set of systems are just bolted on to another and another and so on, and you have a sort of Gordian Knot of technology remaining, adds Lieberman.
However, in the last year or so there has been a change in attitude by banks, says Shaun Mathieson, fraud and financial crimes consultant at business analytics and intelligence software company SAS UK & Ireland. Now, he says, they want to stay ahead of the regulatory curve.
Market abuse is increasingly viewed as a risk to reputation and the bottom line, rather than simply being a box ticking exercise to appease the regulators, he adds. Firms are starting to leverage technological innovation to increase visibility of what is happening on the trading floor; an exercise that brings with it multiple benefits.
Indeed, the result of the activities of Jérôme Kerviel who was assigned to arbitrage price discrepancies between equity derivatives and cash equity prices activities at Société Générale and who wound up losing around €4.9 billion was a concomitant drying up of trading facilities with many counterparties for some time even before its problems became public knowledge.
Only some time after this did these questions snowball into rumours about other institutions exposure to questionable derivatives positions, speculation that exacerbated the severity of the credit crunch when it emerged in 2007/08.
Regulation
Additionally, says Jane Foley, senior FX strategist for Rabobank in London, there are broad-based regulatory measures coming in at a national and international level that trading organizations have no choice but to implement to one degree or another.
The global financial crisis provided a spur to legislative changes to tighten up supervision of the markets, and banks have been looking to effect improvements in this regard since then.
Whatever those regulatory measures might be, says Porter at b-next, it is still down to the discretion of the individual firm what controls they apply.
For a start, the European Commissions Markets in Financial Instruments Directive (Mifid) II should be rolled out across all of the EU by 2015.
Indeed, Mifid II and Basel III are intended to bring much greater transparency to all trading, with the traditionally bilaterally-traded over-the-counter FX derivatives markets being migrated into a mandatory electronically executed environment, all under the auspices of central counterparties that act as middlemen between trading parties and central clearinghouses.
On an even more practical basis, says Andrew Shrimpton, global head of compliance for Kinetic Partners in London and the former head of alternatives supervision for the UKs Financial Services Authority, moves are afoot to bring the UK more into line with the USs Securities and Exchange Commission on the matter of gathering and implementing evidence against rogue traders.
The SEC has seen a marked increase in prosecutions for fraudulent trading and the deterrent that these bring on the basis of allowing reduced sentences for those who testify against the key perpetrator; the FSA appears to be trying to go down that route, Shrimpton says.
Additionally, there are moves by the FSA to allow for wire-tapping and covert surveillance of electronic messaging to be admissible evidence in court solely on the basis of suspicion of illegal dealing activities, as already happens in the US.
Some of the more proactive measures that have come into effect in the UK after the Kerviel scandal, adds Shrimpton, are based on guidance outlined in its Markets Division: Newsletter on Market Conduct and Transaction Reporting Issues/Issue No.25/March 2008.
Among other recommendations, the organization highlighted that if a trader has a high number of cancelled and amended trades in any one period, firms should consider bringing this to the attention of senior trading and control management.
Similarly, it suggested that firms should consider making traders take mandatory two-week holidays: it might be prevent a hothouse trading culture and could also be a useful tool to catch rogue trades because it would disrupt a dealer's ability to falsify positions.
Perhaps the biggest sea-change of all, the FSA made it clear that firms should consider whether or not their staff in all areas of control have sufficient understanding, skill and authority to challenge front-office staff effectively when agreed parameters for activity are breached or when something suspicious takes place.
This last point, says Chris DeBrusk, managing director of business, technical and IT consulting firm Rule Financial in New York, has notably gained further momentum since the FX fix scandal broke.
Since January, we have seen a number of big banks come to us with a view to increasing the power of the compliance sections within their organisations," says DeBrusk. "Some of them are looking at creating front-office risk and control groups on their trading floors, answerable only to the banks senior management and not to anybody connected to trading activities.
Whether or not the markets can change for good, of course, is entirely up in the air, concludes DeBrusk: Trading is a game in which the serious money is made on the edge, so it isnt surprising to find that it tips over that point from time to time, but certainly the regulators seem now to be taking such transgressions a lot more seriously.