OBASHI Think

See things clearly

The dubious events at brokerage MF Global demonstrate yet again how vulnerable investors are in today’s data flow-reliant financial markets.

 

During late 2011, MF Global had been losing money on its currency market bets, and, to stay afloat, it delved into customer accounts and used customer money in attempts to cover its precarious financial position.

 

The attempts failed and the company had to file for bankruptcy.

 

According to the liquidator’s report, in the days leading up to the collapse of the company, movement of cash and related securities [which is to say movements of data]

“...were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions...

 

The flood of transactions was so intense that the company’s computer systems and employees had difficulty keeping up...

 

a number of transactions were recorded erroneously or not at all...”

Whatever the final explanation for what happened, a lot of customers have lost a lot of money.  And it looks like they won’t get it back, because it appears that one of the banks has it, and the U.S bankruptcy laws favour the big institutions.

 

Elsewhere, serious IT failures in banking and finance continue to happen with worrying regularity.  Here are some that have been highlighted in the last few weeks:

 

Tokyo Stock Exchange - Half a day’s trading in almost 250 stocks, and other financial instruments, was lost when a set of servers failed and back-up systems did not kick-in.

 

Credit Suisse - To help conceal losses of $500 billion prior to the ‘credit crunch’, two traders manipulated data in the bank’s record systems, fraudulently by-passing mandatory real-time reporting.

 

RBS – During the lead up to the 2008 financial crisis, The Royal Bank of Scotland ‘failed to implement sufficiently capable risk management IT systems’.  And its "governance, systems and controls and decision-making" appeared to fall short of "best practice", according to a UK Financial Services Authority report into its near-collapse.

 

ASIC - The Australian Securities and Investment Commission discovered that several online stockbroking firms had been hacked, allowing hackers to ‘buy low’ and ‘sell high’.

 

PwC – For 7 years, the IT systems of bank J.P. Morgan failed to properly segregate client-owned money and bank-owned money.  Auditor PricewaterhouseCoopers was fined £1.4 million for signing-off accounts without having evidence that appropriate systems were in place.

 

Icap – The currency trading system run by this brokerage sent a false bid into a market, ½ a per cent higher than the going rate on Euros, causing a brief run on the Swiss franc.

 

As has been said here before, until clarity is created on how data flows in the financial system, ‘we can expect many more outages, failures and glitches in the sector.’

 

And many more ‘dubious events’.

 

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