(FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.)
On February 24, 1995, Barings Bank received a fax from fugitive trader Nick Leeson. In the fax, Leeson apologized for his trading losses that would ultimately bring down the 223-year-old bank and offered his resignation.
That account, from This Day in Stock Market History, cited an important day in an incredible trading saga from 30 years ago.
By way of background, Leeson, as a Singapore-based derivatives trader for Barings, made a series of fraudulent, unauthorized and speculative trades starting in 1992. He managed to hide losses on some transactions and recoup losses on others by doubling down, but the charade stopped on January 17, 1995 when an earthquake in Japan cratered markets and brought large and irrevocable losses to Leeson’s final series of illicit bets.
Losses for Barings eventually reached $1.4 billion, more than twice its trading capital, and the bank was declared insolvent in late February 1995.
Hollywood found the sordid affair interesting enough to make a movie about it, Rogue Trader, released in 1999 (fair warning: it’s rated just 30% fresh on Rotten Tomatoes). And after spending six and a half years in prison in Singapore, Leeson seems to be long-rehabilitated and is now a family man and business writer and speaker.
But bigger-picture, three decades out, the burning question remains: can a similarly catastrophic trading fraud happen again?
First we asked our generative AI overlords what they think.
“Yes, trading fraud similar to Nick Leeson’s could happen again if there are lapses in internal controls or employee misconduct,” was the response. “No system is foolproof and risk management failures can occur.”
“The banking difficulties of the late 1980s and early 1990s were partly due to inadequate credit risk management systems…While supervision can help reduce the possibility of bank problems, it can’t guarantee against them,” AI said. “Similar trading fraud could happen if employees abuse internal controls or if there are weaknesses in an organization’s internal controls.”
To be sure, financial regulation has tightened over the years, in response to the Barings collapse as well as other tectonic market events such as the global financial crisis of 2008-2009.
Johan Sandblom, President and Head of Business Development at agency broker Lime Trading, cited US Securities and Exchange Commission Rule 15c3-5 as providing some measure of security and reliability and a safeguard against rogue trading. The rule, adopted in 2010, requires brokers and dealers to have risk controls in connection with their market access.
“The market access rule makes sure there are controls in place to reduce the risk of something like Barings from happening again,” Sandblom told Traders Magazine. “It is the pre-trade risk check that does the fat finger checks and buying power controls before the order goes out into the market.”
Ultimately, while tighter regulation deters, and advanced technology detects, rogue trading better than in 1995, there remains the risk that an individual with nefarious intent can find a way around the system, or that an honest mistake cascades into a big problem.
“A Nick Leeson–type scenario can absolutely happen again,” said Joe Schifano, Global Head of Regulatory Affairs at enterprise trade surveillance provider Eventus. “The question is not if, but where.”
“With the increasing reliance on advanced technologies – for example, AI-based tools and blockchain functionality – there can be a heightened risk of blind spots emerging,” Schifano continued. “These new tools, while powerful, can obscure human oversight or amplify errors if they’re not properly understood or supervised. We see frequent reminders – from the 2008 financial crisis to sudden market dislocations to early digital assets blowups – that a single individual or group with unchecked authority and insufficient oversight can cause tremendous harm. Strong gatekeepers with the right tools, authority, and direct lines to senior leadership are paramount in spotting red flags early and preventing catastrophe.”
