On a February morning this year, MF Global detected an unauthorized open position in wheat futures, placed by one of its brokers, Evan Brent Dooley. Within an hour the company crystallized a $140 million dollar loss. How they executed these liquidating trades was not elegant or savvy, which may have contributed to the loss. They were trying to cover as fast as possible, so as not to carry an open speculative position on the books – so any clumsiness is understandable.
One failure at MF Global was not having order entry systems to prevent the buildup of large unauthorized positions, by locking out the broker, or requiring approval by management. What if the problem was fat fingers or a computer glitch, or even a stuck computer key on a keyboard?!
But just as importantly, in an industry where orders are given by voice, and even hand signal, knowing WHO you empower in your company to transact those trades is paramount. In such a high risk and high-trust environment, like in a hospital surgical theater or in a nuclear missile silo, banks and brokerages need to have a complete toolkit to mitigate these catastrophic risks.
The solution is a combination of internal watchdog systems that use trading patterns, fuzzy logic and neural networks to instantly detect problems in real-time, along with a program of independent testing and assessment to evaluate whether or not the firm’s current or prospective employees, are potentially the next front-page news rogue trader.
I was an employee at MF Global at the time of this incident, and could chronicle the significant damage this event, and the operational reaction, did to the company’s brokers ability to carry on normal business. I won’t get into it because my interest is not in the blame game. My interest is in testing and assessing people to ensure peak work performance in high-risk and high-trust jobs.