Behavioural analysis systems, interlinked with trading execution technology, were vital in asset management firm Threadneedle catching a 'rogue trader' last year, analysts have speculated.
Threadneedle said today that its systems had prevented a $150 million (£95 million) rogue trade from being executed, but has declined to provide further details. It is understood that the City of London Police and regulator the Financial Services Authority are investigating the incident.
The news contrasts with two separate events in recent years, in which traders at UBS and Societe Generale were allegedly able to circumvent control systems in order to execute billions of pounds worth of illegal trades.
Analysts said behavioural analysis IT systems were likely to have been vital in Threadneedle catching the junior trader before the trade was executed.
"Such analysis systems are able to monitor regular trading behaviour by individual traders and quickly identify when something is way out," said Ralph Silva, managing director at analyst and research firm SRN.
"If the systems are set up wisely, they also allow junior traders very little leeway with their trading limits – straight away they will alert senior managers of anything more than a couple of percentage points beyond a limit and possibly block a trade".
There were risks with blocking trades automatically, however, Silva said: "Supposing a company has built up a position, then blocks a sale – it could then be lumbered with assets it doesn't want to keep on its books." Some firms see this as a disincentive for automated blocking, he explained.
In some cases where systems had failed to help managers catch a rogue trader, Silva said one chain of events could easily take place: "The junior trader calls his manager and says he wants an automatic limit lifted, and it happens because he has a good record. On many cases, even though the limit was only lifted for one trade, months later the company realises it hasn't lowered the limit again – and rogue trades have got through."
"You often also get a situation where it's the IT staff who make the change to the limits in the system, because they come under pressure from traders or management – but they may not be aware of the consequence."
In the case of Threadneedle, Silva said that it was conceivable that if the systems had not successfully identified the problem, the damage could have been much larger than the £95 million being attempted by the trader.
"It could have been a lot worse – what if the trade had gone through, followed by a number of others?" he said. "A lot weighs on where you set the limit for intervention and how effectively you do so."