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How to protect oneself from a dishonest 'trader'
Despite better security systems, defrauders always manage to find a loophole in the system. Brokerage houses and financial entities take all the necessary precautions to stop multi-million swindles.
"There is a common link between Jerôme Kerviel, who became famous for allegedly defrauding Société Générale of 4,900 million Euros, and Bernard Madoff, who vaporised 35,000 million: the ability to get around the –in theory- complex security systems of financial entities and supervisory bodies.
In a time when such swindles have gone from being a rare occurrence to something that happens quite frequently, the question is: what mechanisms do brokerage houses and financial institutions use to protect themselves from the dishonest trader ?
Consecutive levels of vigilance
In practice, these protection mechanisms are increasingly complex, but they are based on establishing direct and indirect controls. The first group includes restricting the volume of transactions that an agent is authorised to make. Alongside this restriction, which is commonsense, a system which in the technical jargon is called the backoffice is in place. In other words, at the end of the session all the transactions made throughout the day are checked.
In the area of indirect controls, the counterbalance risks need to be clearly established. ""The brokerage house, for example, establishes a maximum level of risk that it can assume with each entity that it works with. That is, if you are asking a bank to lend you money for a specific transaction, you must be prevented from exceeding a certain limit"", explains a well-known analyst.
The theory leaves little room for doubts; the practice is another matter. Although a trader may see an alarm in his computer, warning him of a specific risky position, he may choose to ignore it. The discretionary margin, despite the filters, is high. ""Each broker has his own independent account, with a maximum volume established by the entity. And that level cannot be exceeded without prior authorisation"", affirms Jesús Sánchez Quiñones, General Manager of Renta 4.
Intensive supervision
At the end of the day other filters come into play. A supervisor, in this case the clearance department, analyses all the open and closed positions, and calculates the profits or losses of each trader. In the end, they will have gone through three filters: the head of the department, clearance and control. Are they sufficient?
Well no, some entities have adopted new strategies. For example, forcing their operators to take 15 uninterrupted days’ holiday a year so that, in that space of time and in the operator’s absence, the entity can check all his transactions thoroughly."
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Published in Finances and Services by Miguel Ángel García Vega on 20/06/2010
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