Notes on a scandal

Finbarr Bermingham speaks to Aidan Neill, a former trader, to get the inside line on the Square Mile's latest drama

They've never been the most cherished members of society, but it's fair to say bankers' stock has hit an all time low. In New York City, thousands have laid siege to the financial quarter as part of the Occupy Wall Street movement. Bubbling disquiet is set to erupt in the UK too, with Occupy the London Stock Exchange mooted to begin this month. It comes on the coattails of the Independent Commission on Banking's Vickers Report, which recommended the most sweeping regulatory changes in the banking sector of our lifetimes, but which has failed to quash the unrest that manifested itself in such an ugly fashion during August's riots. Unemployment remains high and growth low.

In August, Swiss bank UBS announced 3,500 jobs cuts worldwide in an attempt to save £1.6 billion. Less than a month later, a trader in its London office lost over 90 per cent of that figure in just one night. The sound of knives being sharpened is growing louder every day.

Get the hell outta Dodge

Aidan Neill spent the best part of a decade trading bonds for Lehman Brothers and BNP Paribas, before leaving the City in 2007. Since then, he's started a family, pursued other business interests and kept a blog aimed at "increasing financial understanding". With distance comes perspective Aidan has been a vocal critic of the industry he left because of concerns over the direction it was taking. "The nature of the business was becoming complex," he explains to The Gateway. "Investment banks profess to be facilitating the flow of capital to the right places, but in my role, I was in a conflicted position. You see both sides of the trade, and you're supposed to encourage people to put their money in risky places that are more in the bank's favour than the client's. Every day, you're asking yourself the question: "Who does this serve most?" I was getting tired of the ethics of it and the separation from what the business was supposed to be. As well remunerated as people are, it didn't feel like a productive contribution to society. It wasn't a way in which I could continue to make money."

Aidan had great difficulty in adjusting his morals to fit his job, in part due to influences from other parts of his life, outside of banking. While there are many in the City who face the same daily ethical struggle, for others, their environment becomes a bubble cutting them off from reality and the consequences of their actions. "People work very hard in that world," he says, "and often they become blinkered. They're working 100-hour weeks and only engaging with people with similar mindsets, which limits their ability to see the bigger picture. Very young people have become very wealthy, very quickly. That's not an environment that helps foster introspection as to what they're doing, or whether it's helping the world. The success that has existed in that world has gone without sufficient reflection. The whole industry has become arrogant and there's a disconnect between the 27-year-old who's trading billions of dollars of someone else's money every day, getting a large payout with limited downsides, and the man on the street."

Aidan has worked on the trading floors of two of the biggest banks the world has ever seen, and is acutely aware of the flaws in the system. Even he, though, was left aghast by the reported £1.5 billion loss incurred by Kweku Adoboli on September 15 and says it's "incredible that this was able to happen". But it did. Adoboli started working in UBS's back office before he moved into the front office and Aidan suggests that his background may have had a large bearing on how things unfolded.

Using his own experience as a guideline, Aidan explains how trading should work: "As a trader sitting in the front office, I would enter something into the system, which would immediately get transferred to the back office. My back office would make a phone call to the counterparty (the person on the other side of the transaction), and their back office would confirm that what has been entered went in the opposite way on their side. For example, the confirmation would be that I was buying, he was selling, the quantities and the price. The process is usually quite simple."

"It would seem that Adoboli understood the nuances of the system," says Aidan. "He would have known how the back office interacted with the front office and where the loopholes were." Through his understanding of the back office, Adoboli was able to disguise his unauthorised actions, in the hope that he could buy the time to trade his way out of what ultimately became huge losses.

Adoboli was supposed to be engaging in arbitrage trading, meaning that for every security he bought, he would, at the same time, sell the same amount in another market for a higher price, generating a small profit for the bank on every trade. Because the trades are simultaneous, there is zero risk. But there have been reports that Adoboli crossed the line and moved from pure arbitrage into time arbitrage trading. In this kind of trading, the trader holds back on the sale of the securities he has bought in the hope that the price will rise further, allowing him to sell them for a higher profit. In layman's terms, he was speculating. He was taking significant risks in order to boost the bank's profit margin.

Risky business

That a 31-year-old man, with limited experience on the trading floor was able to incur such heavy losses shocked the nation, particularly when the cases of Nick Leeson and Jérôme Kerviel are still relatively fresh in the mind. For Aidan, it laid bare the extent of the problems facing an industry in urgent need of reform, culturally, structurally and in the way it's regulated. He recalls his early days at Lehman Brothers, when he was when he was buying and selling on behalf of the bank, shifting very large sums of money without having had the time to "build up any real competence". While in any job, it's important to push yourself and get out of your comfort zone, the risks associated with investment banking, says Aidan, make the level of delegation "questionable".

He explains: "There were certainly times when, looking back, some of the people who were put in a position to trade a book had an insufficient understanding of the risk associated with what they were doing. I think if a risk manager for the average FTSE 100 company went in and stood on a trading floor, they'd be very scared by the risk being taken by junior people. There are plenty of very competent people in the space who know exactly what they're doing, but at times there's a disconnect between senior management and what's going on in the trenches. When someone's making money, there's very little consideration of how they're doing it. It sometimes felt like being in a casino. Everybody thinks they're a great gambler when they win, and they find it easy to justify taking chances."

Kweku Adoboli faces an extended period of incarceration, and there are few on the street, or in the media, who would offer him any sympathy. The scale of his losses are hard to fathom, but Aidan says the institutions themselves should shoulder some of the blame, too. Trading floors are unforgiving places and failure, he says, isn't an option. "He (Adoboli) wouldn't have been doing this for his own personal gain. He would have been trying to cover a stupid decision that started small and gradually became bigger. He might have forgotten to hedge a position and when it went offside, he thought: "Well, if I hedge it now, I'm going to lose money, so I'll wait to see what happens." He waited and it didn't go his way. The whole thing was like a very sad gambling story. He kept trying to trade his way out of the loss that he created in the first place.

"It's a highly pressurised environment, where the only measure that exists for success is what your bottom line says, which isn't a great dynamic for running any business. People are desperate to impress, but if this had gone right for him, he'd have ended up getting fired anyway because he was taking risks he shouldn't have been taking. The banks need to strike a cultural balance. They'll always encourage people to take risks, but must be willing to accept that mistakes happen. If Adoboli couldn't "own" his mistakes, then that's dangerous."

Adoboli's losses led to the resignation os UBS's chief executive, Oswald Grübel and, once again, trained the castigating eyes of the world on the financial sector. Despite the controversy, the Swiss bank announced a "small profit" for the third of the year, surprising many commentators. Announcements like these will do little to placate the blood-baying public. Aidan warns that dark clouds are gathering over the City of London, which are only likely to be dispersed by winds of change.