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June 18, 2008

FINRA Advises on Rogue Trading

By Peter Chapman

Take that vacation! That recommendation is at the top of the list in a memorandum issued by the Financial Industry Regulatory Authority addressing ways to detect and prevent rogue trading.

Traders, FINRA says, should be required to take 10 consecutive trading days of vacation time so any unauthorized trades they might have made can be detected.

Barring the trader from accessing the firm's systems for 10 days will ensure any unauthorized trades will be exposed by the firm's trade reconciliation process during that time, FINRA notes.

FINRA's seven-page missive on the policing of unauthorized trading follows on the heels of a $7 billion loss at Societe Generale after junior trader Jerome Kerviel gambled without permission on index futures.

Citing "several recent cases" of rogue trading, FINRA in its memo presented a laundry list of steps a broker-dealer's management can take to make sure their firm is not done in by bad apples.

Besides mandatory vacation time, the steps include monitoring for trading limit breaches, large amounts of unrealized profits or losses, and unusual patterns of cancellations and corrections.

While rogue trading is not typically associated with rule-breaking, FINRA warns that it could result in "regulatory exposure." That's if it involves falsification of books and records; failures in supervisory controls; market manipulation; or fraud.

Most cases of rogue trading in recent years have involved anything but cash equities. Futures, bonds, currencies and commodities have been the instruments of choice.

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