Even though the major banks and trading firms are under intense scrutiny, they still rely quite heavily on trading activities to make money. And as JPMorgan’s “London whale” and a string of other banks have demonstrated, these institutions have a tough time keeping tabs on the amount of risk they are taking amid increasingly complex and fast market.
In many cases, a single set of mistakes was felt by the entire bank – and in a few instances the entire banking community – making it is clear that many risk factors involved are often completely overlooked, misunderstood or that banks are unable to manage them.
The recent “technology breakdown” at Knight Capital extends the paradigm of things that can go really bad, really quickly for financial firms in terms of their technology and trading. After all, it is not very hard to conceive a situation where a rogue trader (as in the case of UBS last year), a poorly thought through hedging strategy (as in the case of JPMorgan Chase this May) or a glitch in the systems of a stock exchange (with UBS unfortunately being on the receiving end yet again, this time during the Facebook IPO) actually brings the bank to its knees.
Read More: Forbes