Internal and external approaches to controlling rogue behaviour. (2012)

“The conventional approach to eliminating rogue trading of imposing external controls is inherently flawed”

Daniel Singer, Professor of Finance, Towson University, Maryland, USA
M. Dewally Assistant Professor of Finance, Towson University, Maryland, USA
Journal of Securities Operations & Custody, 5(2), 171-185.

“Why do financial institutions continue to give traders the broad discretion that allows them to become rogue?

“Risk-taking is seen as necessary for successful financial institutions. Rogue behaviour is a pathological manifestation of this risk-taking. The conventional approach to eliminating rogue trading is to impose external controls on the traders and their financial institutions.

“.. this approach is inherently flawed because of the dynamic nature of financial markets and the need for financial institutions to innovate. … successfully addressing the problem of rogue behaviour requires traders themselves to assume responsibility for aligning their actions to the organisation’s culture of appropriate risk-taking.

“…this may be accomplished by the use of strong moral leadership to create a socially positive organisational culture. Within this context, a theory of moral development (shows) how risk-takers at financial institutions can become self-regulating through the adoption of a principled moral stance.”

Access the full paper here: Internal and external approaches to controlling rogue behaviour.