Thursday, July 24, 2008

Rogue Traders and How Trading Coaches Help Prevent Blowups

France 24 recently filmed a documentary dealing with rogue traders, featuring the case of Joe Jett from Kidder Peabody. As part of the feature, they wanted to get an inside look at how a trading firm avoids blowups. Only one firm in Chicago, Kingstree Trading, opened their doors to the reporters who flew in from Paris; that can be found in the second segment of the documentary. You'll be able to see a few of the prop traders and, of course, yours truly who works with them.

We commonly think of trading coaches as people who can help traders with their performance. An important, secondary function that is rarely discussed, however, is the coach's work with risk managers to prevent losses and even blowups. It's the teamwork between coach and risk manager that helps traders create and follow plans for managing capital (and managing risk), and it's the eyes and ears of both coach and risk manager that identify problems early on to make sure that plans are followed or appropriately modified.

Trading firms have a fiduciary responsibility to investors/partners (and, in some cases, shareholders). Ensuring that traders are able to fulfill that responsibility is a major task of management--and one of the highest priorities in my work with banks, prop firms, and hedge funds.