I was led away from my PhD in theology and into working in the financial markets by a love of poker. Trading, it seemed to me, might be something like playing poker all day, for vast sums of money, without any risk of bankrupting myself. After a few years it turns out that I was more or less right, although I had underestimated the psychic cost of the intensity and repetitiveness of the work. This isn’t to say that traders are reckless gamblers. Yet trading is more like an intricate game than anything else. Traders don’t make anything or develop projects, they win or lose, day by day, minute by minute. Above all, what makes the analogy with gaming unavoidable is the element of personal competition at the heart of the job. For all the financial importance of their decisions and the implications for real economies and real lives, traders remain a group of individuals devoted all day to trying to outguess, outwit, out-think one another, entering on deals purely in the hope of catching their rivals out. It still astonishes me that financial markets are animated by such boyish, combative drives.
A trader spends his days buying what seems to be too cheap and selling what seems too expensive. If you’re dealing in the foreign exchange market then you trade a single number: a fluctuating exchange rate whose current level, to four decimal places, is on display to everyone in the market. Other markets are more complex, and there you deal in esoteric financial products whose price can be calculated only by PhD-level mathematicians. At either extreme, the trader sits trying to pay attention to the scrolling news feeds, graphs and spreadsheets that cover his computer screens, listening to the brokers he may deal through and taking calls from other banks, forming a judgment on the current momentum of the market and watching out for mispriced assets. Most markets cover similar products whose prices should move largely in line with each other. While having to guess whether the market as a whole is going up or down, traders are also trying to pick out the prices that have moved out of line with the rest, buying one bond, say, while selling another.
Traders inhabit a world where everything has its price. It may be a company, as in a stock market, or a currency, or a bond. On top of these there is a huge array of specialised markets in more mathematically complex products, or in marginal commodities – lean hogs or orange juice or pork bellies. All of these things can be bought or sold, and much of trading boils down to making a decision about whether the price is going up or down. If you think something is going to increase in value, you buy, or ‘go long’. If you think a price is going down, you sell, hoping you can buy it back later at a lower price and keep the difference: this is ‘going short’. If you are long you make money when the price goes up, and lose it when the price goes down. When you are short, price falls make you money and rises lose you money. It’s the same whether you’re trading US government bonds, the sterling-dollar exchange rate or coffee futures.
These markets aren’t meant to be playgrounds in which traders can risk their banks’ money, but structures through which those who need to buy or sell something can do so efficiently. A company can ask a bank for a price without saying if it is a buyer or a seller: the bank will show them a ‘bid’, or price at which they are prepared to buy, and an ‘offer’, the price at which they will sell. The difference between the two is the same as that between what a second-hand car dealer will pay for your car and the price at which he will sell it on. The gap between bid and offer is a tiny fraction of a percentage point, but when the deals involved are in millions, that can amount to thousands of pounds.
Banks also make prices to one another, and this is the arena in which traders confront each other most directly. One bank calls another, via a Reuters computer terminal, asking for a price, and if it is shown an offer or bid it likes, it buys or sells. If one bank makes money out of the deal as the market goes up or down over the next few minutes or days, the other necessarily loses it. Some markets are, in a strict sense, zero-sum games: derivatives markets, for example. A derivatives trade is a contract between two banks in which one pays the other depending on a particular market price at some future time. Banks are thus able to speculate against one another about which way a particular market is going without having physically to buy or sell anything. Because they are just agreements between banks, any profit you make from a derivatives trade will be another bank’s loss. In a bond or stock market, on the other hand, it’s possible in principle for everyone to be making or losing money, since they could all be holding a particular stock. But any single deal will result in a symmetrical profit and loss between banks. When as a trader you quote a price to a calling bank, you know that the other trader is waiting – hoping – for you to slip up. If he deals, he’s effectively declaring: ‘you’ve got that wrong, and I’m going to profit from your error.’ You keep on making prices, though, partly because that gives you the right to call back and become a predator yourself, and partly out of an arrogant belief that, whatever he may think, if he deals on your price, the odds are he’s the one getting it wrong.
The trading floor of popular imagination, with its scrum of bellowing, arcanely gesticulating men, is largely a thing of the past. Most trading now takes place in large, open-plan dealing rooms like the one I work in, filled with traders sitting at computer screens. There are perhaps four hundred people on the trading floor in my bank, divided up into various well-defined functions. As well as the traders, there are salespeople soliciting potential clients, economic and mathematical analysts, IT people and lawyers. Few of them are over 40, and at least three-quarters are men (there’s just one woman trader), but in other respects there’s a surprising diversity. On my desk, a 27-year-old with a PhD in astrophysics sits next to a 45-year-old who left school at 16. Traders start work between seven and eight in the morning, sometimes earlier, and leave at five as activity in their markets dies down or they hand over to colleagues in the US. There’s no lunch break; you can wander out for as long as you like at lunch, or at any other time during the day, but market prices move all the time and there’s always a chance you will miss a profitable deal, so most people step out for five minutes to buy a sandwich to eat at their desk.
‘Open outcry’ trading, in pits where traders deal with one another face to face, is now found in only a handful of markets. The others have been replaced either by electronic exchanges, where computer systems match up buy and sell orders from different banks, or by banks dealing directly with one another by phone or the Reuters terminal. There are also broking firms which act as market intermediaries. Each trader has a set of speaker-boxes in front of him, linked directly to up to a dozen brokers, who could be next door or in another country. A trader wanting to buy or sell something can give an order to one of his brokers, the broker and his colleagues will shout the price down the lines they keep open to all the other banks in the market, and if they can match up a buyer and a seller they take a fraction of the deal as commission. Everything is anonymous until the moment the two banks agree a price.
Brokers use all sorts of tricks to coax banks into trading. They may hint that a bank out there is willing to trade at attractive levels if only someone will show a reasonable price. They may even fake bids and offers they don’t really have to lure traders into showing counter-offers or bids. Even so, there remains something arbitrary in deciding which broker to use if you have a deal to do, as any of them should be able to execute it. It’s easy to see why brokers are the major force in City entertainment, ever ready to take traders out to the local bars, restaurants or strip clubs in the hope of winning their favour. It’s a strange experience to go drinking with these people, with their eagerness to please and their over-readiness to laugh at your jokes. I suppose there’s nothing unusual in such one-sided relationships, but City brokers are perhaps marked out by their degree of commitment, and the extent of their availability. A trader can get his brokers to treat him to a good meal any evening he wishes.
The technological dealing rooms still display much of the energy characteristic of the old trading pits. Primarily, it’s a matter of noise. The speaker boxes are usually live, with brokers shouting down buy and sell orders, their strained, distorted voices merging with the sound of traders talking, joking and shouting to each other, with the occasional room-wide broadcasts, as economists and analysts interpret the latest economic data, and with the computer terminals which bleep as traders execute deals or communicate with other banks, to generate a charged, edgy atmosphere. The intensity of the market is audible, quickening as key economic figures come out. But an outsider might also be taken aback by the informality of many of the traders, who sit chatting and reading the papers or wander around to talk with friends. The job is hard to bear without a measure of unconcern, a capacity to switch from concentration to contemplation or amusement.
Every trader manages a portfolio of the hundreds of deals he has done, whose values are constantly shifting. At every moment, he’ll know how much money he has made or lost that day, or over the year so far, and what his vulnerability (‘exposure’ is the technical term) to future movements in the market is from deals still outstanding. Within the group, a sheet circulates every morning showing how much each person made or lost the previous day. The job requires not only a predatory alertness, but an ability to tolerate the minute-by-minute changes in one’s profit-and-loss account and the anxiety involved in anticipating future shifts in prices. The strange emotions that come from dealing with money compound the intensity, although, perversely, the larger the sums, the less powerful these emotions become. To lose the bank £100,000 in a day is in no sense comparable to losing £100 of your own money. The numbers are just too big to arouse the satisfaction or frustration that usually comes from making or losing money. The shorthand of the dealing room increases the remoteness of the figures – a million pounds is a ‘quid’, a billion of anything is a ‘yard’.
Different traders deal with the pressures differently. Some of the more experienced develop a deep detachment: they’ve been through the swing from profit into loss and back again so many times it rarely concerns them any more. Others become possessed by their markets. At the introductory dinner on my first day at the bank, I noticed one of the traders taking surreptitious looks every half hour at his portable computer, a little handheld box showing the latest foreign exchange prices. I asked him if he dreamt about them. He answered that he didn’t have to. He woke every couple of hours in the night, rolled over to check the prices, and fell back asleep. Some dealers will instruct their counterparts in Hong Kong or New York to phone them, in the middle of the night if necessary, if their markets reach certain critical levels. As a rule, traders don’t sleep well.
They’re not normally kept awake by the risk factor, however. Risk measures the amount of money you stand to lose, or make, if the market moves; the potential for greater profits necessarily increases the losses you’ll incur if you’ve judged the market wrongly. Even a successful trader might make money only 60 per cent of the time, so accepting losses goes with the job. There are both formal and informal limits to the amount of risk traders may take. A manager will be aware of their exposure, instructing them to ‘close out’ positions when he believes too high a level of risk has been taken or too much money lost. Less negotiable limits are imposed by the bank’s computerised risk systems, which model the potential losses on adverse movements in the market and alert management if the figure becomes dangerously high.
It’s impossible to generalise about what the limit might be. It varies enormously between banks and between traders. Some traders aim to make one or two million a year for their bank, so a position that may cost them £100,000 is sizeable. Others look to make ten or more times as much, and run correspondingly higher risks. Even the risk taken by the most aggressive traders is extremely unlikely to jeopardise the solvency of a bank; the risk systems see to this. The danger posed by a Nick Leeson or a John Rusnak (the Baltimore trader currently under investigation) is somewhat different: that of traders deliberately concealing or falsifying deals they have done, so preventing the bank from even registering the risks or the losses being incurred. Deal-checking procedures should make that impossible, but there’s always a chance that badly designed monitoring systems may have blind spots that will eventually be found by traders who are clever or desperate enough. High-profile cases are extremely infrequent. But in every year in every bank there will be cases of people losing money and then their jobs. Traders don’t automatically lose their jobs after a bad year, but they rarely survive two consecutive years of losses.
Concentrating on a market whose movements determine your success and failure produces a wearying anxiety. But there’s also something satisfying about the abstraction, condensing every piece of information and opinion on a stock or an economy or an interest rate into one figure. Dozens of bright minds are bent exclusively towards this number, working lives spent gauging moment by moment whether it’s too high or too low. If there’s something absurd about this expense of energy (I spend my days analysing forecasts of Polish interest rates), the sums of money that can be lost or made provide an offsetting seriousness. In trading rooms there’s an extraordinary, almost demonic fusion between the self-serving, relentless pursuit of profit, and some of the higher reaches of abstract thought, as embodied in the teams of post-doctoral mathematicians and physicists employed by every big bank. And for the competitive, simplistic characters who tend to be attracted to trading, there is the stark allure of the notion of profit and loss. The politics, the hierarchies and the dependence on the support and recognition of others that prevail in most jobs seem to be swept away. Instead, there is a direct translation of ability and intelligence into profit. It can be brutal when you’re losing, but if you have something to prove, you can prove it indisputably, in black and red.
For all the excitement and opportunities for self-assertion, there are good reasons why few people do the job for very long. There is some truth to the clichés about ‘burnout’. If you allow yourself to worry about the market, the anxiety will infect the whole of your life, while the concentration required and the need to take rapid decisions are physically wearing. Furthermore, much of the day is boring. There are long stretches during which markets stagnate or drift, when no one puts in any orders to buy or sell and there’s literally nothing to do. The skills needed to do well are extremely limited, and only the variations in profit and loss save your days from being repetitive. The knack of judging whether a market is going up or down, or picking out one asset whose price is out of line with the others rarely improves much after the first three or four years. Finally, the skills you learn are almost wholly untransferable. Learning to predict whether long-term US dollar interest rates will move up or down a fraction of a percentage point on any given day doesn’t equip you to do anything else. Learning to trade is like over-developing a highly specialised, but largely useless muscle. After a number of years, most traders, finding themselves tired or outmoded (and usually rich), quit. I have never quite worked out what they do then, but few carry on once they stop caring about the money.
The social side certainly doesn’t keep people there. Trading’s a solitary business. Each dealer has his own account, with its own accumulation of profits and losses, and most of his pay comes at the end of the year in a bonus based on his final profit figure. Other people’s performances are largely irrelevant. Traders talk a lot, but rarely about work. Usually it’s schoolboy banter, going with the maleness of the room. Mockery and self-deprecation help to relieve the frustrations of losing or to deflate the egotism of the successful. There’s a limit to the playfulness, though. When someone is losing a lot of money, he is accorded a nervous, solemn separateness, and people stop talking to him. If someone has lost a million pounds in one afternoon, you have to know him very well to gauge how he wants to be spoken to, whether it’s better to ignore the disaster or to try to laugh about it. Furious shouting occasionally breaks out when a misplaced comment, or just an innocent enquiry into how someone’s day has gone, is made at the wrong time. One of the first things you learn when sitting with traders is not to ask them how they’re doing.
Trading well requires no social skills. Strange or obnoxious people can thrive. In many ways, the culture is extremely conservative, informed by a mix of tabloid xenophobia and public school chauvinism. But when managers really care only about the money their traders are making, and traders’ respect for one another is focused so exclusively on profit, race or appearance becomes irrelevant.
Even those excited by the logic of trading can find it a disheartening profession in the end. Financially, the rewards are indubitable, but earning money by making money from manipulating money is also the sole purpose and object. For those not totally enchanted by money (many traders are), there is something suffocating about this, a sense of becoming diminished by the concentration on this abstract stuff.