I clearly remember reading about Nick Leeson and the fall of Barings Bank in 1995. I was just a few years out of college in a foot-in-the-door position that wasn't all that exciting. To counter my boredom, I started reading my boss' Wall Street Journal before he got in. The news was interesting, but not thrilling - until I got to the Leeson scandal.

Learning from Leeson

I clearly remember reading about Nick Leeson and the fall of Barings Bank in 1995. I was just a few years out of college in a foot-in-the-door position that wasn't all that exciting. To counter my boredom, I started reading my boss' Wall Street Journal before he got in. The news was interesting, but not thrilling - until I got to the Leeson scandal. I was captivated. How could one man's trading activity bankrupt an institution that was a major part of London's history? The scandal was so unfathomable that people across the world took notice - and not just those in the financial markets. What amazes me today is that despite how far the industry has come technologically, this history could repeat itself.

The opportunity to actually interview Leeson, who granted Advanced Trading an exclusive interview, and get his unique perspective on the Societe Generale scandal and the risk management challenges faced by the industry (see "Confessions of a Rogue Trader," page 34), was even more thrilling. Listening to Leeson recount his experiences was a lesson in history. His knowledge of trading, trading management and, of course, rogue trading make him the No. 1 authority on the topic. He is articulate and extremely knowledgeable, and the advice he provides is advice that every firm should heed.

A lot has changed since 1995 - technology has created a completely new marketplace, one in which tracking and monitoring trades should be a non-event. Apparently not. According to Leeson, rogue trading still happens every day - just not of the magniutude of his transgressions or the SocGen scandal. He says smaller-scale incidents simply are dealt with internally and often covered up.

Leeson points out that a scandal of the SocGen magnitude "comes down to a complete breakdown of systems and controls." He makes the point many times that risk management systems at many firms just don't work - either they are too complicated or they are being used by the wrong people. Leeson stresses that the first line of defense against rogue trading is to monitor the trading floor with a group that does not report to traders, but that fully understands the business of trading and the products traded. Those people should be in a position to question traders knowledgeably and without fear of recourse.

Every time there is a scandal, the industry starts buzzing about risk management. But the buzz usually dies down and we return to the status quo. Right now, all predictions are that risk management spending will increase. At a recent TradeTech event, Larry Tabb, founder of TABB Group, predicted that despite reduced technology spending in many areas due to market conditions, "Risk management will dominate IT growth," and spending on risk management technology will grow by 13.6 percent over last year. But only time will tell if the industry finally is serious about reducing its risk exposure.