Nick Leeson may have gone to jail after bringing down Barings Bank in 1995, but the cartoonish appeal of rogue traders has seen him reinvent himself as an after-dinner speaker and teacher. A free online course Leeson is offering for would-be day traders ought to be a useful primer for those who don't want to make the same mistakes he did. But the more useful lessons might lie not in history but biology.
Barings' former head of derivatives trading in Singapore has something to impart about risk management and the psychology of losses. Leeson brought the UK bank to its knees by acting more like a reckless gambler than professional trader: by taking huge speculative positions in futures markets and then doubling down on them as prices dropped. His behaviour was an archetypal study in a now well-understood human condition: a readiness to take disproportionate risks to avoid financial losses.
Most of the lessons from Leeson's story are more relevant for big banks than individuals playing the markets from home. Nor have they been learned. Jerome Kerviel and Kweku Adoboli's more recent unauthorised losses at Societe Generale and UBS, respectively, dwarfed those of Leeson. The most important teaching is that rogue traders tend to have previously worked in middle and back offices, so that they know how to subvert internal systems.
Day traders would benefit more from an understanding of the human body than the collapse of Barings. Scientist and former investment bank trader John Coates argues that levels of testosterone and cortisol act as excellent predictors of profitability and risk-taking. And, an ability to monitor and regulate these hormones, possibly by taking saliva samples, might give a trader an edge. In his book, "The Hour Between Dog and Wolf", Coates shows that the "winner effect" leads to overconfidence and that, vice versa, a sustained losing streak can lead a person to irrationally stay out of the markets. The answer is to take a few days' break from trading when hormone levels are out of kilter.
Rogue traders have an enduring fascination, and offer a useful study in common human failings. But the biology of trading is a more interesting, and less appreciated - field.
Barings' former head of derivatives trading in Singapore has something to impart about risk management and the psychology of losses. Leeson brought the UK bank to its knees by acting more like a reckless gambler than professional trader: by taking huge speculative positions in futures markets and then doubling down on them as prices dropped. His behaviour was an archetypal study in a now well-understood human condition: a readiness to take disproportionate risks to avoid financial losses.
Most of the lessons from Leeson's story are more relevant for big banks than individuals playing the markets from home. Nor have they been learned. Jerome Kerviel and Kweku Adoboli's more recent unauthorised losses at Societe Generale and UBS, respectively, dwarfed those of Leeson. The most important teaching is that rogue traders tend to have previously worked in middle and back offices, so that they know how to subvert internal systems.
More From This Section
Rogue traders have an enduring fascination, and offer a useful study in common human failings. But the biology of trading is a more interesting, and less appreciated - field.