In the City

Ben Gilbert

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.

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