Free to Trade

by Michael Ridpath

  I had an idea. It was an enormous risk, but the pay-off would be big if it worked. I had no time to check it with Hamilton. If it was going to work I would have to act now.

  I rang Cash. My heart rapped half a dozen times in the second it took him to answer the phone.

  ‘I’d like to buy another fifty million if the price is right.’ I was amazed at how steady my voice sounded.

  Cash laughed, ‘Way to go, Paul! Let’s make some money here! Hang on.’

  That didn’t tell me anything. More sales meant more commission for the salesman. Cash, at least, would be making money. The real test would be when Cash came back with a price. If there were still millions of the bonds to sell, then he would be right back with a cheap offer. In that case I would have a fight on my hands to wriggle out of my purchase. If they really had sold the whole issue, then there would be lots of excuses and a higher offer.

  I hung on for what was probably only a minute, but seemed like ten. Finally Cash came back on the other end of the phone.

  ‘I’m sorry about this. I’m afraid we can only manage ten million, and then only at a price of 99.’

  I could tell from Cash’s voice he was expecting protests from me for offering fewer bonds than I wanted at a price half a point above his competitors’ offer. He didn’t get any. I wasn’t angry. Here was an opportunity and I was going to make the most of it.

  ‘OK, I’ll take ten at 99.’

  I had to move fast. Next call was to Claire.

  ‘Are you are still anxious to sell the new Sweden?’ I asked.

  ‘Oh, but yes of course,’ she purred. ‘I can get you some at 98.50.’

  ‘Fine. I’ll buy twenty.’

  After two more phone calls I had managed to buy another $15 million at 98.60. That took my total holding to $145 million. I sat back and waited. I still felt tense, but this was the tension of the hunter, not the hunted.

  It didn’t take long. Within two minutes the lights began to flash with dealers bidding for bonds. Their bids rose from 98.60 to 98.75 to 98.90. Then David Barratt called.

  ‘I’d like to buy twenty million of those Swedens at 99.10,’ he said.

  ‘That’s a very high price for a bond with such limited prospects,’ I teased him, unable to keep the euphoria out of my voice.

  ‘It’s a funny thing,’ he said. ‘The price fell as I thought it would. Then someone somewhere bought some bonds. Since then the dealers have been scrambling to cover their shorts, but haven’t been able to find bonds anywhere. So they have driven the price up. The really funny thing is that a couple of my English clients who have been sitting on their hands for a month have just taken it into their heads to buy. They think the bond has value, and the rapid run up in price makes them afraid they might miss a move up in the whole market.’

  I sold David $20 million and unloaded a further $75 million over the rest of the day. Claire had been especially imploring. BLG had lost a lot on that one. I decided to keep $50 million on the basis that it could move up further over the next week or two, and sold some other bonds to raise cash for the purchase. I totted up my profits. I had realised nearly $400,000 profit over the day, and had unrealised profits of $300,000 on the remaining $50 million.

  I slumped back in my chair. I felt drained. It was as if I had been physically beaten up. The tension, the adrenalin, the sweat of the last few hours had left me limp. But I had got it right. In a big way. No matter what Hamilton might say, he couldn’t deny that. For the first time in my life, I knew what it felt like to take on the market and win. And it felt good. I had shown myself that I could be a good trader, as good as the best. I hoped I had shown Hamilton too.

  ‘Come on, smug features,’ Debbie interrupted. ‘If you have any more afternoons of successful spivving, let me know. I am sure the second-hand car business would give anything for one as talented as yourself. In the meantime, why don’t you buy me a drink?’

  ‘How come I always get to buy the drinks? Don’t they pay you a salary here?’ I said, putting on my jacket.

  I had a thought. ‘Just a moment, I have got to make one more phone call.’

  I dialled the Imperial Hotel. When I asked for Hamilton McKenzie the operator told me he had left a message specifically asking not to be disturbed. I marvelled at the man’s coolness. So much at stake, and he had deliberately taken steps to avoid hearing about the outcome. He had enough confidence in me to let me handle it by myself. As usual, he had been right.

  With my smug look intact, I switched off the machines and followed Debbie to the lifts, leaving Jeff still engrossed in his statistics.

  2

  The train lurched to a halt at the Monument station. Silently, about a quarter of the passengers stood up and picked their way through the carriage to the doors. I was one of them. We dropped on to the platform, and climbed the short flight of steps through the ticket barrier and out into the July sunshine. There our company of office workers split, and was met by a much larger battalion marching out of step across London Bridge. I joined a contingent striding up Gracechurch Street towards my offices in Bishopsgate. A few lost individuals struggled against the advancing army in an attempt to fight their way down the street. They were jostled and pushed for their temerity. Since ‘Big Bang’ the commuting crowd had started earlier and earlier, as salesmen, traders and settlements staff struggled to ensure that they were not the last to their desks to talk to Tokyo, or Australia, or Bahrain.

  Although the army seemed unified by one purpose, getting to work and making money, each individual carried his own concerns, worries and responsibilities with him or her. Some days I would thrust myself through the crowd, eager to get to my desk and work on the problem that I had mulled over in my disturbed sleep the previous night. Other days I would drag my feet, jostled from behind, as I delayed the inevitable confrontation with yesterday’s bad position. Often, I would just drift along with the others, my mind still asleep, shutting out the expected events of the day until I was sitting down with a cup of coffee in my hand.

  Today, though, I rode above them all. I had made $400,000 in the last twenty-four hours; who knew how much I would make in the next? I had an irrational conviction that any trade I did would turn money into more money. I knew this would not last. But I should enjoy it while I could. Eventually luck would abandon me. Fifty-fifty trades would all go against me. Certainties would be blown away by the unforeseen. My computer would develop undetectable bugs. My job was like a drug with highs and lows. Was it addictive? Probably.

  It was certainly more exciting than the large American bank I had joined after Cambridge. I had spent six years in the credit department, analysing companies that borrowed from the bank. I had to decide whether the companies would be in a position to give the money back. The job was intellectually interesting, but the bank had done its best to make it boring. It felt like a grey factory, staffed with grey workers who had weekly quotas of a certain number of pages of analysis to produce.

  It had suited me though. The bank had been very understanding about the hours I kept. They obviously thought it was good public relations. The general manager of the London office was an American, an ex-college football player and a devoted sports fan. It was fine with him if I arrived at work late or left early. Holiday days were not counted scrupulously; I could have as much unpaid leave as I wished. The whole office was proud of its Olympic eight-hundred-metre bronze medallist.

  They hadn’t understood when I had given up running. None of them had. The general manager had taken it personally. There was nothing wrong with me. I was still young. In four years’ time the gold medal was mine for the taking. How could I let him down like that?

  The grey work got greyer. I was expected to work a full day. With nothing else to distract me, the drudgery became unbearable. I needed something new, a challenge, something to win.

  So when I saw an advertisement in the Financial Times for a junior trader, I put together a CV and sent it in. The advert said that a small fund mana
gement firm, De Jong & Co., was looking for someone with good credit experience whom they could train to become a portfolio manager. After two more weeks of tedium, I had received a reply. They wanted to see me! I liked the people I had met at my interviews. I thought them both bright and friendly, people from whom I could learn a lot.

  I was particularly impressed with the man I was to work for, Hamilton McKenzie. He was a neat, slim Scot of medium height, in his late thirties. His prematurely grey hair always looked as if it had just been cut, and he wore a beard which was carefully trimmed close to his chin. His blue eyes were cold and aloof until he focused them on you. Then they seemed to bore right into your mind, exposing everything, evaluating what was revealed. Indeed Hamilton appeared to be thinking all the time, judging, calculating. At first I found this intimidating, and could not feel comfortable in his presence. But he was an excellent teacher. He saw things clearly, and he explained things clearly. He often made me feel like an idiot for not reaching his conclusions, but he always took the time to lay out how he himself had arrived at them. His criticism, although harsh, was always constructive, and he was determined to teach me all he knew about portfolio management.

  And he knew a lot. He had the reputation of being an inspired taker of risk. Much of modern portfolio theory emphasises the hopelessness of trying to beat markets which are efficient. Many modern portfolio managers concentrate on matching or narrowly outperforming the market. Hamilton thought this was ridiculous. His view was that the institutions who gave their money to De Jong to manage, paid their fees for ideas. He believed his duty to them was to make as much money for them as he could, any way he could. This meant he took risks, big risks. But he did not take them indiscriminately. Rather, he would wait until an attractive opportunity arose, analyse all the risks, avoid or hedge as many as he could, and then, when he was sure the odds were in his favour, make his move. De Jong & Co.’s clients were happy with the results, and gave him more money.

  The firm had been founded by George De Jong twenty years earlier. It had originally managed the funds of a number of prominent charitable trusts. Since Hamilton had joined eight years previously, the firm had attracted clients from overseas, especially Japan, bringing the total funds under management up to two billion pounds. For the last five years Mr De Jong, who was now in his late sixties, had come into work only three mornings a week. He still retained total control of the firm, and made a very good living out of it. The funds were invested in bonds in a range of currencies, and the management of these was left entirely in Hamilton’s hands. Six people worked for him, including me.

  Jeff Richards was the most senior of us, with two decades of investment experience. His job was to determine which way exchange rates and interest rates would move, and position his portfolios accordingly. A mild-mannered man with a very academic approach to the markets, he was generally quite successful. Rob Greenhalgh helped him in this, and was also responsible for managing the non-dollar bond positions. He was about my own age and had been with the firm two years. We also had a ‘chartist’, Gordon Hurley. He used the technical analysis of historical prices to forecast future prices. This seemed to me little better than reading tea leaves, but Gordon got it right more often than he got it wrong.

  My role was to look after the dollar portion of the portfolio, which represented more than half our funds. This was Hamilton’s area of interest, and one in which he still played an active part. Eventually, the idea was that I should share this role with Debbie, who was even newer on the desk than I. At the moment she spent most of her time on administration and legal documentation, and on some of the more harmless trading. We all shared one assistant, a quiet but highly efficient girl of twenty named Karen.

  I had been part of this team for six months, and I loved it.

  I continued up Bishopsgate until I reached the tall, blackglassed headquarters of the Colonial Bank. As the Colonial Bank’s fortunes had dwindled, so had its usage of its headquarters, to the point where it now let out the top half of the building. De Jong had the twentieth floor, two from the top. I took the lift up, and entered the plush reception area, all polished mahogany, worthy leather-bound books, and eighteenth-century prints of old trade routes and sleek tea clippers in full sail. The room gave the impression of solidity, of distinction, of wealth earned a century before by the financiers of imperial trade, of conservative investment decisions quietly taken. The reality was that the firm was only twenty years old, and its customers’ money was daily wagered against the market by Hamilton and his team behind the oak doors.

  I went through those oak doors and entered the trading room of De Jong & Co. This was much smaller than the trading rooms of the investment banks, or brokers that bought and sold securities from customers round the clock. As a relatively small investment institution, De Jong did not have many people. Although it was more active than other investment managers, the firm did not trade round the clock. We only bought or sold bonds when we had a particular view on the market.

  Nevertheless, even in its quieter moments, the room exuded an atmosphere of suppressed tension, which I found exhilarating. Here the fate of two billion pounds was deliberated. Information flowed in from all over the world, either through the telephones, through the screens, or on paper. It was analysed, debated, picked apart and then put together. A decision was made; to buy one security, to sell another, or simply to do nothing. Each decision resulted in the movement of millions of pounds. If we got it right, our clients would be tens or hundreds of thousands of pounds to the good. If we got it wrong … The responsibility was taken seriously by all of us.

  The room had two external walls that were entirely made up of thick glass windows. They faced south-east and south-west. From twenty floors up you could see right over the City of London to the low hills beyond Upminster in the east, the needle of the Crystal Palace mast in the south and the tower blocks of Middlesex to the west. The internal walls were bare except for the obligatory clocks telling the times in Tokyo, Frankfurt, London and New York, and a large white board covered in blue scribbles recording a trade we had executed months ago.

  There were eight desks in the room. Each was equipped with the paraphernalia which is necessary to move money around the world; Reuters and Telerate screens, which provide up-to-the-minute information on prices, news and markets; personal computers for analysing portfolios and historical price data; a complicated phone system with a board displaying a dozen or so lines which flash rather than ring, and large wastepaper baskets for throwing away most of the two-foot-high pile of research received every day with the post.

  One of the desks was larger than the others, slightly less cluttered, and was positioned a little away from the rest. Empty at the moment, it was the point from which Hamilton controlled the room, and devised his next strategy for beating the markets. Close enough to keep informed, far enough away to keep in control.

  It was five past eight, and I was the last in this morning, as I thought I had every right to be. The room was fuller, and more active than it had been the day before. Rob was back from his holiday and Gordon from his seminar. They were both on the phone, and Rob’s voice was raised to a level which suggested he was already exercised about something. Jeff was glued to his computer, in exactly the same position I had left him the night before.

  ‘Morning,’ I said, as I passed. I got a grunt in return.

  I walked over to my desk, and turned on the array of switches above and below it. As the machines whirred into life, Debbie greeted me, ‘Morning, smuggerlugs. Thanks for the drink last night.’

  ‘Give me a break,’ I said. ‘Everyone gets lucky sometime.’

  I opened my briefcase, and threw the previous evening’s reading on to the desk.

  ‘Don’t tell me you actually enjoy that stuff,’ said Debbie, pointing to a yellow pamphlet carrying the Bloomfield Weiss logo. She walked round to my desk and picked it up. ‘ “The Volatility of Volatility: How Information Decays over Time”, by George Fe
uchtwanger Ph.D. That sounds a bundle of laughs.’ She opened it up to a page covered with long equations each interspersed with tortuous sentences. ‘OK, so what does that one mean?’ she asked pointing to a particularly long string of Greek letters and Arabic numerals.

  ‘It means “Good morning, Paul, please can I get you a cup of coffee”,’ I said.

  ‘And this one means, “Go and get your own coffee, you lazy bastard,”’ she said, pointing to almost as intricate an equation just below it. But she tossed the research piece on to the desk, and turned towards the coffee machine.

  I liked Debbie. We had worked together for only two months, but in that time we had developed a good understanding. She thought I was too dedicated to my work; I thought she was not dedicated enough to hers. But she was fun. She put the minor ups and downs of the bond market into perspective. You never got a chance to take yourself too seriously with her around.

  She was in her mid-twenties, small, with light brown hair, which she wore tied up in a pony-tail. She was probably a little overweight, although this gave her a softness which was attractive. A broad smile was never far from her lips, and her bright brown eyes never kept still, dancing from one object to the next.

  She was a lawyer by training. After a couple of years of articles for a middling firm of solicitors, she had had enough of the law, and joined De Jong & Co. There she had not entirely escaped, since she spent her first couple of years in our ‘back office’ devoting much of her time to working on the legal structures of our funds, and on compliance with the stream of new regulations that were intended to make sure we didn’t steal any of our clients’ money. Eventually she had persuaded Hamilton to take her on as a junior trader. Despite giving the appearance of doing almost no work at all, she had been quick to learn.

  She got on well with everyone in the firm. Even Jeff Richards warmed to her banter. Only Hamilton seemed to have equivocal feelings towards her. For him, there could be no excuse for a lack of commitment.