Why The Volcker Rule Would Have Stopped The UBS Rogue Trader


There’s one proposed clause of the Volcker Rule that might have stopped UBS’s Kweku Adoboli.

Although he wasn’t prop trading or taking any illegal money, he was working in a system that incentivized low-level traders like him to take risks. Jesse Eisenger at ProPublica explains:

Traders on market-making desks are often paid handsomely in a manner indistinguishable from prop traders — by bonuses based on how much profit they make the bank. Mr. Adoboli was a lower-level employee at UBS. Such employees have an incentive to try to take more risk because when they make more, they get bonuses and their bosses get bigger bonuses.

The draft of the Volcker rule has language to address this issue. Regulators can look to see if the compensation looks more like that of prop traders as a signal that yes, walking and talking like a duck does make one a duck.

The Volcker Rule would change pay structure to compensate traders based on fees charged for products they create, rather than profits from trading. Proponents of the Rule must be pleased with the timing.