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Rogue trader who cost UBS £1.3bn highlights failure to monitor unauthorized dealing

A rogue trader who cost UBS bank an estimated £1.3bn has been arrested by City of London police.

According to reports, Akweku Adoboli, a 31-year old trader, was arrested following UBS's announcement that a rogue trader had caused massive losses.

"UBS has discovered a loss due to unauthorized trading by a trader in its investment bank" UBS said. "The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn."

The failure to monitor fraudulent activity of this scale yet again highlights the need for banks to constantly monitor and upgrade their fraud systems.

In 2008 a rogue trader, who cost French bank Societe Generale £3.6bn, was accused of using computer hacking techniques.

The bank said that trader Jerome Kerviel used computer passwords belonging to others, as well as his experience of the controls placed on traders by the back office to make high-risk trades.

Paris-based Kerviel used his knowledge of automatic checks, which are carried out on trades to make sure they are legitimate, to avoid being found out. He risked billions by betting on future trends in the stock market.

There were parallels between Kerviel and Nick Leeson, who in 1995 lost Barings Bank more than £800m through unauthorized trading. Like Kerviel, Leeson had back-office expertise and used his knowledge to avoid checks and balances. There is little information bout the UBS incident but it is another example of a trader acting beyond authorization in a highly regulated market.

Richard Bentley, vice-president of banking & capital markets at Progress Software, says it is very worrying that such rogue trading can still occur, after all the high-profile incidents of recent years.

"Clearly strong questions will need to be asked of UBS's risk controls and processes. Internal risk controls are not something that a financial firm can take for granted or leave to run unchecked; detection of criminal fraud or market abuse is something that must happen in real-time before any unauthorized trading has a chance to lose a firm money or move the market."

Bentley says risk management systems will have trading limits specified and checked in real-time. "The good news is that technology does exist in the form of real-time transaction monitoring and surveillance solutions that analyze data transactions in flight." Progress Software acquired UK-based Aparma, which specializes in complex event processing in 2005.

This story was first published by Computer Weekly