Morgan Stanley’s IT systems were at the heart of a failure to prevent a rogue trader in London from costing the company $120 million (£61 million), Computerworld UK has learnt.
A spokesperson at Morgan Stanley said it was “not an IT system" that identified the problem, indicating that a human had spotted that the trader was falsely booking values of credit derivative products.
The Morgan Stanley trader, reportedly identified as Matt Piper, is suspected of increasing the value of his derivatives book in order to make his performance appear more impressive, according to the Financial Times. The problem was identified in May, when the company immediately alerted regulator the Financial Services Authority (FSA) and suspended the trader.
In a statement, Morgan Stanley said: “The firm became aware of marks in a London based trader's book that were inconsistent with firm policies. The trader was immediately suspended.
“We informed the FSA and are currently conducting a full internal review of this matter. The amount of the mismark was approximately $120 million [£61 million]." The FSA said it could not comment on investigations.
The £61 million is significantly less than the £3.6 billion lost from Société Générale by rogue trader Jerome Kerviel revealed in January. But analysts urged that lessons still had to be learnt by trading firms. IT-based controls at trading firms need to become much stronger to prevent these situations from happening, analysts agreed.
Firms were “not taking seriously enough” threats from their own traders, said Ralph Silva, senior analyst at financial services advisory firm Tower Group.
The cost of preventing rogue trades, through implementing technology to detect and stop rogue trades immediately, is far less than the possible financial implications caused by the trades, he said.
But there was a fundamental cultural problem in trading firms, where they were loathe to put in extra controls in case it meant they lost their edge over rivals. “They don’t want too many controls or it would kill aggressiveness,” he said. “But the problem is that traders are held at such high esteem, they have carte blanche to do what they want.”
“Trading firms are taking a minimalistic approach to solving the problem, forced to take some action because Basel II [regulation] has an operational risk component. But they’re not giving it the same attention as other areas of risk. This is not going to be the last time this happens.”
Traders often know how to circumvent the IT controls, Silva said, so better technology is needed to catch suspicious behaviour. He said biometrics and better human resource monitoring would make sure only the right people had access at the right time, and that their permissions were quickly cancelled on the systems when they left the company or were no longer in the same function.
Most banks had “decent” alerting functions, Silva said. But he added: “A rapid response system is needed in these places, where a manager can request information from traders and get an immediate response. At the moment, managers have to go to the trading floors and ask each trader for information on anything suspicious and that isn’t quick enough.”
Managers then needed the ability to immediately stop individual traders from trading when something suspicious had been identified, he said. There also needed to be better technology to alert audit departments to any suspicious activity.
Richard Dunn, a former risk manager at trading and investment bank Merrill Lynch, was quoted in the FT as saying that “the checks and balances surrounding the trader ought to have kicked in earlier”.
The FSA has in the past said trading firms needed to make tougher steps to improve governance of traders, and to make a clearer distinction between trader rights and IT staff rights.
In March, Credit Suisse confirmed £1.4 billion of mismarkings in one quarter, the FT reported, and Lehman Brothers suspended two of its own traders pending a review of positions.
Morgan Stanley’s pre-tax earnings for the quarter to 31 May fell 61 per cent year on year to $1 billion (£513 million) on the back of weaker revenues, as the credit crisis took a toll on trades.