Thursday, May 21, 2009
Trading While Intoxicated
Oil traders in London have a richly deserved reputation for boozy, three-hour lunches from which they return to the office for a few hours of TWI - Trading While Intoxicated. As it has been the norm for more than 30 years, rarely did anyone get in trouble for it. Today, however, drunken cowboy traders are about as welcome as a fart in an elevator. Financial News has a great story up about a trader at Morgan Stanley - David Connor Redmond - who took a large short position in WTI after an alcoholic lunch. He then buried it in a colleague's book, because he knew he had breached the firm's risk limits. An oil trader friend of mine said: "This shows the downside of electronic trading. If he had been on the phone doing the business someone would have noticed." I pointed out that if it had been done by voice it would have taken the bank longer to find out. He said the damage done by electronic trading can be much more "instantaneous". True enough. But how is one trader able to put on such a large position in the first place? There should be risk limit controls on each trader and certainly firm-wide. The fact that he could hide it in another colleague's book shows that there were no such controls in place. Morgan Stanley and others like it should be a lot more concerned about their risk controls than over how much their traders had to drink at lunchtime.