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A rogue trader is an employee of a financial institution who begins acting independently, without authorization or approval from the employing institution. The rogue trader conducts trades which are not authorized, often in a manner which is reckless. Rogue traders can lead to significant losses for their employing institutions. Perhaps the most notable example occurred in 1995, when trader Nick Lesson singlehandedly bankrupted the venerable Barings Bank by engaging in speculation with Nikkei index futures.
The motivations behind the decision to become a rogue trader vary. Some people who have written and talked about their experiences as rogue traders describe a slippery slope which started with small unauthorized deals which gradually snowballed into larger and larger deals and turned into something which the trader could no longer control. Some also described a sense of vindication as they felt right about the trades they were making, with an element of feeling as though they were outsmarting their employers by making better trades than those the employer would have authorized.
As a rogue trader becomes more confident and aggressive about conducting unauthorized trades, the risks for the employer increase. Employers can take substantial losses as a result of trades conducted without their knowledge or approval and because markets can be extremely volatile, these losses can happen very fast. Rogue traders also tend to act with increasing disregard when it comes to the money they are supposed to be stewarding for their employers and clients, and they may behave recklessly in regards to their own commissions and future as well.
Aggressive, can-do attitudes are encouraged on the trading floor. When seeking employees, financial institutions often specifically look for people with these traits, because people are are not confident will struggle to make deals. Unfortunately, this tends to select people who are also at risk of becoming rogue traders, as an employee will become increasingly confident working on the floor and can fall into the trap of thinking that it is impossible to slip up.
Penalties for rogue traders vary. When a trader is publicly investigated and outed, prison time can be the result. If a company can catch a rogue trader before substantial damage is done, it may opt to fire the employee rather than launching a public investigation. Financial institutions are very sensitive to their reputations and the reputation of the market in general and rogue traders tend to make their parent companies look bad.