Blockchain Development: Detect rogue trading using the Blockchain

Rogue Trading
Rogue trading is an issue that has plagued multinational banks since their inception. Defined as a trader who acts independently of others. The banking industry as a whole has lost upwards of £10 billion due to rogue trading, the most recent of which was Jerome Kerviel who lost £3.7 billion in 2008. In some cases, these losses have brought down whole banks as is the case with Barings Bank and Nick Leeson.

Societe Generale – £3.7 billion
Barings Bank – £827 million
Allied Irish bank – £697 million
Daiwa Bank – $1.1 billion
Sumitomo Corporation – $2.6 billion

How it Happens
Rogue trading occurs when a trader covers up trades by booking a trade that hedges directional risk. Typically, the trading will “book” these hypothetical hedge trades so that they can cover up large positions. If these positions go south, the bank can stand to lose a lot of money. The compensation structure means that there is an unlimited upside (larger bonus) for the trader but limited downside (getting fired).

How it Can Be Prevented
Policies and strict governance can prevent rogue trading but another more direct way is stricter controls on the technologies used for booking these trades. Inefficiencies and inconsistencies in databases used within banks may allow traders to hide these trades from the central risk book. DataSpartan worked on a Blockchain proof of concept platform that addressed these database inconsistencies.

How Does Blockchain Help
A Blockchain type solution allows different departments within the bank to have a consistent view of orders – this is because it is impossible to delete or change any of the executed trade orders without other departments agreeing. This provides transparency about trade execution and minimises the chance of rogue trading.

Our Results
The proof of concept is now being fully integrated into a subset of the servers in the multinational bank for live testing. APIs have also been built to allow developers to interface with Blockchain functions.


Posted on

August 20, 2021