Shadow Banking

by C. M. Albright

  A few minutes went by and all was well. It didn’t pay to get too nervous but Fergal couldn’t help himself. He was eager to make a good impression on Keith and the rest of the desk. He was emboldened by his performance over the past few weeks and he felt Keith was impressed with his abilities.

  Fergal leaned back in his seat and looked around the dealing room. He stretched, yawned and scratched his head, allowing himself a few moments to think about the night ahead. He and Al had planned a big one. They had no rigid schedule. They would hit the Golden Hind for a couple straight after work, then jump in a cab to the West End and take it from there. Just the way he liked it and pretty much the same formula that he, Al and Miles had been utilising for the past few weeks with consistently drunken and hilarious results. They were great nights, nights he knew he would never forget although there were sections of the nights that he couldn’t even remember the following morning such were the industrial amounts of Guinness that he had consumed.

  Anyway, back to the job in hand: Keith’s dollar/yen. Fergal lunged back towards the desk and as he did so, he caught the lip of a paper cup of coffee that he had left to go cold that morning. He watched it as it tipped forward and hurled its mud-coloured contents all over his keyboard. There was a loud, almost pantomime, sizzle followed by a popping sound and a thin wisp of smoke. Looking around desperately for anything absorbent with which he could mop up the spillage – and finding nothing to hand – he dabbed at the keyboard with the sleeve of his jacket. 'Shit!'

  The speakers suddenly burst into life. A growling voice started to holler: '70 given yen, offered, 66-69, given; 65 offered, 60 offered . . .'

  'What the fuck?'

  Sweat sprang from Fergal’s pores as though bubbling up out of bore holes. Fergal realised that a big sell order was going through and with so many traders in the boozer there were fewer participants to clear the risk with. Should he stop it out and sell them now? It was through Keith’s level but was it just lower because the market was so thin? Should he ride it out? Wouldn’t that be what Keith would do?

  '55 given yen,' the voice bellowed.

  Fergal had never felt so alone in all his life. Instinctively, he looked around for help. Rob Douglas’s words of wisdom from the graduate training programme came back to him, haunted him. 'Panic is counter-productive. Decisions made at moments of extreme emotion are almost always wrong.' But Fergal was a prisoner to his emotions. Panic was on its way, heading downhill, on roller-skates, and with a strong tail-wind.

  'Shit, shit, shit!'

  Dollar/yen kept on falling. 50 … 45 … 40 … Fergal could hear the brokers over the wire as they reached a state of apoplexy. The blood was hammering in his forehead and the pressure behind his eyes felt as though it would launch his eyeballs across the office like champagne corks. Fergal picked up the receiver and clicked into a line, yelling: 'Ten yours!' He was out but at what cost? And to make his predicament all the more hideous, he watched the screen as the numbers began to rise once again. Fergal had given the low; he had been caught in the perfect storm and he had gone down with all hands on deck. The next half hour felt as though it lasted a month. Fergal sat watching the screen knowing that the moment when he would have to explain to Keith what had happened was getting closer and closer.

  And finally, there were Keith’s heavy footsteps and his cheery voice: 'I see we got stopped out on dollar/yen. What did you get them out at?' Fergal didn’t need to act as though he was bereft, he just let his face assume its natural posture and Keith could see it was bad. 'Fergal, where did we sell them?'

  Keith winced and visibly shrank as Fergal said, '38.'

  '38! That’s the low. Jesus Christ Fergal, tell me you’re fucking joking.'

  'I wish I was.'

  Keith threw himself into his seat, tore off his jacket, then jumped straight back up again. 'Oh Fergal! What happened?'

  'I could bullshit you but I’m not going to. I got scared. I panicked. I got distracted. By the time I realised what was going on, it had all gone tits up. I spilled coffee on my keyboard and then a big sell order went through Manders.'

  'Does a fucked up keyboard prevent you from hearing where it’s trading? Why didn’t you sell them when it went through 60?'

  'Well the market was really thin and I thought that was the reason why it was selling so fast. I tried to think what you would do and I guess I just froze.'

  Keith shook his head. The silence was deafening.

  'Fergal, what’s the value of one pip in ten million dollar yen?'

  'Er, well a pip on one million is ten thousand yen, which is basically a hundred bucks. So it’s a thousand dollars a pip.'

  'So Fergal, you running my stop for twenty points cost this bank an additional twenty thousand dollars on top of my losing position. Fergal? How much money have you got in your wallet?'

  Fergal fumbled for his wallet and produced a crumpled twenty pound note, a five punt note and a battered condom. Keith rolled his eyes and pulled an envelope from the top drawer of his desk.

  'Give me the cash, Ferg.'

  Fergal did so and Keith took the two notes from him and put them in the envelope which he then sellotaped onto the bottom of Fergal’s screen.

  'You can have that cash back when you learn that you never ever run a stop loss again. When it’s through, you get out. Fergal, we have fun here but this is a deadly serious business with huge amounts of money at stake. The twenty thousand dollars you’ve lost is probably not far off your annual salary. You got it?'

  'Got it,' Fergal managed, his shock rendering him almost mute.

  'Good.'

  USD/CHF: 1.247

  Nick Stevens, the Head of Options Trading, closed the door to the meeting room and sat down opposite Miles. Miles watched him, his expression entirely devoid of emotion. 'Well, the thing is,' said Nick. 'You’re not going out of your way to endear yourself with the majority of the office.'

  'I’m not sure I understand what you mean.' Miles knew exactly what Nick meant but he wanted to hear him say it. Nick slapped his hands down on the table, palms-down. It was an action that Miles had seen him do in the past and it meant: 'I’m going to level with you.' Miles settled back, his hands rested on the arms of the chair.

  'You give the impression of being quite aloof sometimes. You give the impression of being judgemental. The general perception is that you’re already judging guys on a job they’ve done for many years, a job of which you have very little experience.'

  'I wasn’t aware of that.' Miles knew exactly what some of the others on the trading floor thought of him and he didn’t give a shit. If he had a view, Miles was going to express it. They were simply debating about markets. Wasn’t that what they were meant to be doing?

  Nick leant forward in his chair and met Miles’s gaze. Miles thought that if this was meant to be a bollocking – an English expression that he was particularly fond of – then it was unlikely to have the disciplinary effect intended. Nick Stevens was a good trader but his management style was non-confrontational. Miles knew that people felt that as a rookie, he had not paid his dues and earned the right to openly disagree with them. Naturally, Miles did not agree. Wasn’t it supposed to be a meritocracy?

  'It’s all about P and L, Miles. I told you that. When you have P and L against your name, then you can do what you like. You’re shaping up well, Miles. I can see that. We all can. But until such time as you’ve made the grade, you need to be careful about voicing your opinions so vociferously. These people don’t like to be challenged by someone who’s just left school. Do you see what I’m saying?'

  Miles could see exactly what he was saying. Miles also recognised that Nick was telling him this because he liked him. After all, Miles knew he could learn a lot from Nick who was one of the few people that Miles respected at Trenchart Colville.

  'Well, I’m sorry Nick. I didn’t mean to appear arrogant. It’s just when I see something in the markets that makes sense to me, I tend to express my opinions and welcome the o
pportunity for debate. By the same token, I don’t see why I shouldn’t participate in debating others’ ideas. It’s not personal and without wishing to sound overly conceited, what I say is often proven to be true.'

  The hands were being slapped down on the table top once again. 'Look Miles, it’s not a problem for me. All I’m asking is that you’re a little more aware of the politics of the trading floor. Don’t go out of your way to wind people up, is all I’m saying. Run a lower profile. Let the P and L talk. Our desk is going to have a cracking year and you will be an important part of that.'

  Miles broke eye contact with Nick, not through embarrassment but as a sign of his acceptance of Nick’s advice which Miles admitted to himself was good. Miles knew that he would not be at Trenchart Colville in a few years time. But if he was going to use the bank as a launch pad to a trading career, then he needed to play the game, do what needed to be done.

  'Understood Nick.'

  'Look Miles, senior management are already very impressed with how things are shaping up for you at Trenchart Colville. They can see a bright future for you.'

  Miles stood up and made for the door.

  'Oh Miles, I’m going for a drink after work with a couple of options guys from other banks. Couple of bookies coming too. Why don’t you come along?'

  Miles smiled as he grasped the door handle. 'Sure, Nick, I’d love to.'

  SP500: 486

  'Blessed are those who get the beers in when they’ve done something right for a change,' said Keith Peake with a big grin in on his face.

  'Cheers Keith, thanks a lot.'

  Fergal felt a warm feeling, something he hadn’t felt since scoring the winning goal in the under 9s inter-house five-a-side soccer competition at school. The quiet of the morning had been shattered when Lyons Oil had asked for a hundred million dollars against the yen. Fergal had looked over at Keith to check that he was OK with him managing the trade. After all, Fergal was responsible for dollar yen but even so, this was a big ticket. Fergal shouted out his price, 'fifty-five, sixty-five!'

  'Mine!' shouted Sabine, Trenchart Colville’s marketer in Paris.

  'Shout ’em out,' yelled Fergal.

  Thanks to the speed of his colleagues and Fergal’s judicious ability to trade on the right prices, he had ended up buying a hundred and thirty million dollars at an average of sixty-two. That left Fergal long thirty bucks and spot rallied forty pips in the next ten minutes. Fergal squared his long on this thirty leaving a profit for Trenchart Colville of a cool hundred and fifty thousand dollars.

  'How’s it feel to make a hundred and fifty bags in ten minutes flat?' asked Keith. 'Fun ain’t it?'

  Two hours later and Fergal was in pretty good shape considering he had just broken the spot desk record for the number of pints of London Pride consumed in a lunchtime session. Nine. It was Keith’s record. As he made his way back to the desk, he was swaying somewhat but it was really little more than an accentuation of his customary loping gait and didn’t draw much attention from the rest of the trading floor this being a Friday lunchtime and many of them having imbibed more heavily than they might have done on any other day of the week. The only real casualty of the nine pints of London Pride was his ability to speak but he knew that the others would keep an eye on him for the remainder of the afternoon.

  'Look at the state of him,' said Keith leaning back in his chair as Fergal tried to aim his big meat-like fingers at the keyboard. 'He’s a legend in the making.'

  But as Keith and the spot desk enjoyed Fergal’s vain attempts to appear sober, one of the trading veterans, Dickie Ramsey, staggered across the floor to his desk, his face port red with burst capillaries that traversed his nose and cheeks like the contours on an Ordnance Survey map. His nodding head and deliberate movements as he aimed one foot in front of another with wayward precision made Fergal look as though he had spent lunchtime in the gym. But Dickie Ramsey’s inebriation was more genteel and well-rehearsed than his younger Irish colleague who had already heard legendary stories of Dickie’s enormous capacity for alcohol.

  'Take a look at that,' said a trader called LJ who sat next but one to Fergal and the eyes of the spot desk swivelled to see Dickie shamble back to his desk and sit down. No sooner had he done so than he was up again and this temporary respite had done his ability to navigate the office no favours at all. As he made his way towards the other side of the floor he misjudged a sharp corner between a row of desks and crashed into the desk of the treasurer, Basil Dewinter, sending a computer screen crashing to the floor. This he might have got away with were it not for Basil Dewinter himself sitting at the desk and looking at the screen which was now lying on its side on the floor spitting sparks.

  'Christ,' said LJ. 'This is going to be a problem. He’s on his last warning isn’t he, Keith?'

  'What, for getting pissed?' said Fergal in alarm.

  'It’s not just the drinking,' said Keith. 'His P and L’s been shit for a couple of years now and JJ thinks he’s a waste of air. The way it works is that they claim you’ve got a problem then highlight it officially over a period of time and then it’s goodbye. That’s just the way it goes.'

  Fergal achieved a moment of clarity: 'But we’ve just been in the pub drinking as much ale as we can get down our necks.'

  Keith looked at him as though he had spontaneously grown another head. 'Fergal, we’re doing fine, our P and L is on budget. We’re rockin’. We can allow ourselves the occasional lunch.'

  Fergal witnessed the events of the afternoon unfold through a haze of London Pride. Keith was called into an office with JJ, Basil Dewinter and the head of HR, old laughing bollocks who had addressed them all those months before on their first day on the graduate training programme. Everyone reappeared twenty minutes later looking sombre and Dickie wasn’t seen on the floor again. Keith called the members of the spot and forward desks into a room and, Fergal, still struggling with basic motor functions, listened as he explained that, 'Dickie Ramsey and the firm have come to an agreement that Dickie will be leaving to pursue other interests.' Keith’s use of HR jargon made Fergal want to laugh. It sounded like it should be a joke. But no one in the room was laughing. Dickie was gone. And what gave Fergal his second moment of clarity of the afternoon was when he looked around his colleagues and realised that although the sacking had turned the mood sombre for a moment, none of them really gave a shit about Dickie. They were thinking about themselves and how they might avoid ending up in the same predicament.

  Back on the spot desk, conversation was muted. Fergal felt the need for another drink to stave off his impending hangover and suggested they all go out and bat on from lunchtime. Keith, however, put a dampener on the idea when he said: 'No dice mate. It’s Friday. Friday’s the night when you have a quick couple and then it’s home to put your feet up with a bottle of wine, a take-away and the wife. Not necessarily in that order. Weekday nights and lunchtimes are for chucking some liveners down your Gregory – not weekends.'

  Back in the Golden Hind, Fergal saw Dickie sitting in the corner of the bar with a couple of his old cronies who were laughing and joking and taking the piss out of him. But when Fergal went to the Gents a few minutes later, he saw Dickie at the urinal, forehead resting against the wall, looking defeated. There he was, a piss artist in his late forties, qualified for absolutely nothing. Fergal thought for a moment that he might say something to Dickie, offer some words of consolation, perhaps. But the thought that it might be him one day leaning his head against the toilet wall with his P45 in his pocket made the words catch in his throat.

  Fergal walked out of the Gents and didn’t even go back to the bar to finish his pint. For the first time in his short adult life, he was going home early on a Friday night.

  6 Risk Meetings

  Fed Fund Target Rate: 6%

  As Fergal was wont to point out to him, the days were getting longer and the skirts were getting shorter. Easter 1995 came and went but Miles Ratner barely noticed. Even when he was in the Gold
en Hind with Al, Fergal and Imogen, his mind was on the job. The job meant everything to him. Markets had always captivated him but the complexity of working on the currency options desk with Nick Stevens was fascinating. Here, risk across a whole portfolio of options was boiled down to a set of Greek letters: delta, gamma, theta, rho, each describing mathematically different risks which were all interconnected. It was like trading in three dimensions. Miles was so focused on the intellectual challenge of trading the options book that he often found himself dreaming of managing short strikes, what was the real value of the strangle and how do you correctly hedge vanilla convexity?

  Whereas others – Fergal and Al being two of them – were feeling their way into the markets and having minimal contact with research, Miles actively sought the opinions of David Welling, Trenchart Colville’s head of research. Miles enjoyed the debate between them and the mental challenge of having his opinions, instantly and without mercy, critiqued by the market.

  At the start of May, Miles felt that the dollar was becoming increasingly undervalued. Fundamentally, dollar weakness made sense with a monstrous trade deficit and poor interest rate differentials that were likely to worsen as the market began to speculate that the Fed would cut interest rates. But for that reason, bulls were scarce and the market the world over was short. Miles sensed that a change in tone, albeit very slight, would be enough to trigger a vicious short squeeze. Technically, David and Miles had recognised that a break in dollar mark above the fifty day moving average would confirm the reversal and should lead to aggressive position reduction.

  Miles obsessed over this idea and confident that he was onto something, he discussed it at every opportunity with Nick and David. What challenged Miles still further was that neither of them shared the same view, but they came to realise that the pain side for the dollar was higher.