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Courtsiders at Tennis – why not the financial markets?

Courtsiders at Tennis – why not the financial markets?

Nicolas Corry, Managing Director, nicolas.corry@skadilimited.co

At 22 years of age, Dan Dobson was paid to travel the world and watch tennis. Was he a reporter? Well, kind of. Last year Dan was arrested at the Australian Open tennis tournament for Courtsiding. Dan’s job was to report back live data to betting syndicates on how the tennis was progressing at the tournament. The aim being to provide the gamblers with an edge by reporting data faster than it could be received by the counterparties they were betting against. In an interview with the BBC Dan explained how he reported information. Using a simple device in his trousers he relayed scores back to London. Pressing one for Djokovic, two for Murray for example.

This story intrigues us at Skadi Limited. Often in the world of sports betting there are a number of parallels with the financial markets, and indeed a number of participants in the financial markets also play the sports markets in their spare time. Therefore it is plausible to see that a practice in one market could be imported to another. The question is whether “Marketsiding” is a plausible risk, and if so what form might it take?

We consider it to be a plausible risk as the practice is simple, and more complex practices/frauds have been unveiled which have similar goals. Consider the Merrill Lynch Squawk Box case of 2009 where retail brokers permitted day traders to listen in to orders they held, by simply leaving their telephones next to the squawk box for the trading day. Nowadays we receive warnings about the risks of using webcams. How much would a syndicate pay for access to the webcam on the desk of the head of block trading at Barclays one wonders?

There are also interesting parallels between Courtsiding and some of the activities of High Frequency Traders. Courtsiders attempt to relay information before it reaches the broader gambling market. High Frequency Traders invest significant capital in infrastructure and feeds to process orders faster than the broader market. But more simply could syndicates place persuade personnel located on a dealing floor, to relay information on orders held by a trading desk, allowing parties to position to take advantage of that flow? It surely couldn’t happen, could it…?

Hold the algorithms! Fraud risk is high!

Hold the algorithms! Fraud risk is high!

Nicolas Corry, Managing Director, nicolas.corry@skadilimited.co

It sounds somewhat cliched to say that banks are undergoing significant change, nevertheless we are told that HSBC is considering its UK position, Deutsche Bank is undergoing reorganisation, Mizuho has purchased a $3bn loan portfolio from RBS and taken on board 130 US staff. Standard Chartered is experiencing a significant number of managerial departures within its Middle East Franchise. Meanwhile JP Morgan has caught headlines by revealing it is introducing an algorithm which can anticipate rogue employees.

Whether an algorithm can detect rogue trader fraud risk remains to be seen. One observation is that while the JP Morgan development is eye catching, it may have the effect of reducing vigilance, as control staff presume that they can rely on the effectiveness of the new tool.

Having analysed the three significant rogue trading episodes of the past 20 years, namely Barings, Soc Gen and UBS we have identified red flags which equip auditors well when approaching a business. Setting aside the corrupt nature of the individuals, which is hard for auditors to anticipate, all of the episodes had features in common which were a result of the organisational setups they found themselves in. These features had the effect of providing the opportunity for the frauds. This was the nurture combing with the individuals’ corrupt nature.

These include management vacuum, businesses in transition, lack of operational challenge as control staff take on unfamiliar businesses. Our advice is that when auditors approach a business with one or more of the above, they should be on their guard, as these conditions provided the opportunity for Messrs Leeson, Adoboli and Kerviel. No algorithms, no eye catching headlines, just prudent analysis and common sense.