Wednesday, November 7, 2012
As the New York Times reports (see here), once again a trader has apparently taken an enormous bet with his employer's money and lost, thereby costing his employer, a small Connecticut brokerage firm, millions of dollars and threatening its continued existence. David Miller, described by the Times as a "journeyman" with a career that includes stints at some of Wall Street's less distinguished firms, bought roughly $1 billion of Apple stock hours before Apple was to announce its earnings for his employer Rochdale Securities in what the firm's president called an "unauthorized trade." When the announced earnings were below expectations, Apple's stock price fell and the firm was then forced to sell the securities at a considerable loss.
I have no idea whether Miller's trading was a calculated effort of his own to secure a huge gain for his employer and perhaps a corresponding large bonus for himself, an execution of a strategy approved by supervisors, a ministerial error resulting from a "fat finger" (as Rochdale has reportedly told potential financial rescuers) or something else. However, this situation, along with better-known recent examples of purportedly unauthorized trades which have caused massive losses (some of which, potentially at least, might eventually be borne by taxpayers) lead me to wonder whether there should be a criminal statute prohibiting "reckless" trading of other people's money. Many statutes, generally state, prohibit reckless behavior which causes, or just puts people at risk of, death or physical harm, including in New York reckless assault, reckless endangerment, and reckless driving. I wonder whether just as the law criminalizes reckless conduct which may cause physical harm, it should criminalize reckless conduct which may cause monetary harm. Such a statute might criminalize conduct when one "takes a substantial and unjustifiable risk in making trades with money other than his own and that such risk is a gross deviation from the standard of conduct a reasonable person would observe in that position." (Cf. N.Y. Penal Law Section 15.05).
The bonus system which gives great incentives to hugely successful trading by one whose own funds are not put at risk (at least directly) and lesser disincentives to hugely unsuccessful trading encourages taking long-shots. Perhaps that is the way the markets should work. However, contrary to my visceral feeling that governments enact too many penal statutes, I believe a prohibition of reckless trading which results in severe financial loss might be worthy of consideration.