Global Custodian Blog

Risky Business

Submitted by Ellie on Thu, 01/31/2008 - 16:47.

During my first and only trip to the trade desk of a London bank during the filming of the Global Custodian documentary last fall, I felt my pulse begin to race. It was like walking into a pressure cooker or an after-school basketball game oozing with sweat and fierce, rushed competition.

The trade desk is known worldwide to be one of the most stressful environments on earth. Traders are renowned for their ability to aggressively push the limits. Yet this environment is undergoing critique after one of Europe’s largest banks lost almost €5 billion because of one such trader.

When the news about Jerome Kerviel surfaced, it read like a novel. Actually a novel my colleague James Kingston recently reviewed called Naked Option by Joe Kolman. As the novel opens, you are inside the trader’s mind as his competitiveness and dissatisfaction rises at once, as he feels the need to prove himself — and he has the power at his fingertips. Before you know it, you understand the risky trade he essentially ends up making to ruin his career.

Earlier this month, a 26-year-old London city trader jumped to his death from the 19th floor of a Hilton, after doing drugs to cope with his job. A recent article in The Guardian notes that since the sub-prime mortgage crisis, psychiatrists report a surge in traders seeking help. The article sites a 2001 American study of brokers that found 23% to be clinically depressed (7% is the average rate for American men).

A quote in the article seems to give insight to today’s situation. Dr. Ari Kiev, a psychiatrist who specializes in counseling hedge funds, says that some traders react by either extreme fear or by losing all judgment: "They start selling furiously, then when the market turns up, they immediately buy. They're too reactive, far too anxious."

The New York Times recently reports that stress levels have come under intense scrutiny since the Kerviel story broke. Apparently three suicides have occurred at Société Générale in the last three years.

A representative at Soc Gen told The New York Times that the most recent of three suicides occurred last June, involving a trader with two children in his 30s who worked in equities and derivatives. After being questioned for unauthorized trades, the trader jumped to his death from a nearby bridge.

It is interesting that the media turn to illuminate the stress of the trader when he loses a lot of money. In reality, shouldn't we be more focused on the stress on risk management systems that allow such a loss to occur? But perhaps the stress goes hand in hand.

In a recent interview, Ralph Silva, an analyst at Tower Group, pointed out that traders are very much rewarded for being aggressive, and this contributes to a culture that does not help risk management. In some occasions, traders that have done the same thing as Kerviel but make money have been given large bonuses. Therefore, aggression is rewarded. When it is punished in some circumstances and rewarded in others, this doesn’t do well for a fraud-preventative culture, Silva says.

Perhaps this culture of aggression contributes to both the degradation of mental health for the trader and the degradation in the operational risk management system. But putting the whole front office through yoga class seems unlikely. What a hedge fund source told The Guardian sums up the attitudes on the trade desk: "Teaching traders not to get stressed is a bit like teaching soldiers not to be afraid of bullets."

Ellie Behling, reporter
ebehling@globalcustodian.com