The feeling associated with extreme risk taking can be almost impossible to describe. Studies have been conducted on skydivers in order to explain their experiences. Responses range from ‘It is a waste of time to even begin to describe what I felt’ to ‘I felt alive’. This is often how I felt at the time, and is where the feeling of risk taking might seem contradictory.
On the one hand, some of the trades that I did were so large they were almost surreal. On the other hand, it was precisely those trades that made me feel that the market was ‘real’ – almost as if I could touch it.
On the one hand, some exceptionally volatile or chaotic moments in the financial markets in reality lasted only seconds or minutes. On the other hand, it was precisely those moments that felt to me like an eternity.
When the market had been quiet for a long period of time, I longed for the moments of extreme pressure. Long-term thinking (beyond a year, say) might be a good strategy for investments, but the explosive nature of trading rarely caters to such behaviour. The ability to share and describe those brief moments of utter exuberance or nightmarish gloom requires an audience that truly understands how they feel. Invariably, other traders who have been through similar experiences make up that crowd. This sentiment has nothing to do with which bank you happen to be employed by, which is why I am not surprised by the nicknames of some of the foreign exchange chatrooms revealed in recent years. If a name such as ‘The Cartel’ or ‘The Mafia’ is chosen for a group of colluding FX traders, it shows how much the members respect each other – even though they officially play for different teams (or banks).
When, on 11 December 2012, Tom Hayes was presented with an arrest warrant, accused of LIBOR manipulation, he corrected the police officer’s pronunciation. ‘You mean LIE-BOR’ (rather than LEE-BOR), Tom said before being driven to his cell.5 When, back in the 1990s, our FX chief dealer exclaimed that ‘The Governor has never made a two-way price in his life!’, all the traders agreed that it did not matter how powerful or closely connected you are to the foreign exchange market, unless you had ‘been there and done that’ as a trader, you would never understand what it was like. Such a self-perception creates a kind of exclusivity. What might be regarded as snobbery or arrogance by others adds to the glue that binds traders together. The more difficult it is to explain the situation to other people, the more natural it becomes to seek understanding among like-minded individuals in the trading community. A club mentality is a natural consequence of this.
Regulators and lawmakers have uncovered an almost endless list of comments and remarks made by traders that in any other situation would be regarded as outrageous or scandalous in relation to the LIBOR and FX manipulation cases. While many of these should undoubtedly be seen as indefensible, and they hardly portray traders in a sympathetic light, they also provide a rather one-dimensional view of how traders think.
‘You interacted with these guys and lived this life and I’d love to get your perspective,’ a Bloomberg journalist asked me when doing his background research on traders and brokers who had been actively involved in the LIBOR derivatives market. I have to admit that I was initially taken aback by the journalist’s casual claim that I had lived that ‘life’, implicitly suggesting that I was like them. However, he was probably correct in his assessment. There were not many other people who could relate the ‘life’ they had lived before they were labelled rotten apples – let alone afterwards.
***
It would be tempting to classify voluntary risk takers, and traders among them, simply as gamblers and thrill-seeking hamsters. Nothing, however, could be further from the truth. Rolling a dice or spinning a roulette wheel does not involve any skill, only luck. Going on a roller coaster ride in an amusement park certainly provides a thrill, but your fate is completely in someone else’s hands (the builders or the engineers). The same applies to turbulence when flying. Even though I know the risk of crashing is minimal, the knowledge that I have to rely on the pilot and Mother Nature makes me feel uncomfortable, rather than excited, when hitting turbulence.
Traders, in my experience, want to have some control over the situation even though the reality – which is often unpredictable, volatile or even dangerous – appears to make this impossible. That is not to say that traders do not like going to Las Vegas, Monte Carlo or amusement parks. Some I have met enjoyed participating in ‘Fight Clubs’, amateur boxing events where they almost certainly ended up taking an almighty beating. Others like racing cars, knowing that the risk of a fine or temporarily losing their driver’s licence is a constant threat. I remember a trader once showing a large black-and-white photograph of his Porsche and the speed at which it was going, sent by the authorities as evidence against him. He held up the photo as if it were a trophy or diploma for others to admire. Most experienced traders are also aware of the culture of alcohol, drugs, betting and bizarre sex games that have been witnessed by numerous storytellers about the City or Wall Street. I have no intention of adding to this growing literature, because addictions in various forms are common throughout society. In my experience, traders who are involved in such activities are not doing so to complement the professional risk taking done during the day. Rather, given the constant stress of the dealing room, they are a form of relaxation that can become obsessive – a bit like my own running or interest in music. However, no matter how extreme – and, in some people’s cases, also risky – such hobbies might be, this should not be confused with the buzz of trading. Some might see it as a luxury add-on, others as a price you have to pay to survive being at the top of your game.
Trading is very addictive. Once you get hooked on the adrenaline rush, other things in life can begin to feel less and less interesting – and less and less important. Problematically, this change is not easy to spot yourself. I never thought about how many of my friends and acquaintances worked in the financial markets until March 2009, when I was required to freeze my communication. I was shocked by how short my contact list had suddenly become. In fairness, I was so out of touch with reality that a profit or loss of $100 million almost felt ‘ordinary’.
Merrill Lynch, together with its four US investment banking peers – Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley – was an aggressive risk-taking institution by almost any measure. The profitability of these institutions (and subsequent disaster for some of them) was a direct result of their appetite for, and ability to warehouse, risk. As traders, we were regularly fed updates on how well the other four investment banks were doing in terms of profitability. Information also slipped through in rumours and gossip. Over the years, discussions gradually gravitated from ‘How much have you made?’ or ‘How much are you making?’ to ‘How much can you make?’ The amounts became more abstract and the capacity to take risk began to seem limitless. Up until 2009, this change appealed to me. It was a development that suited who I was as a person, or perhaps who I had become. However, what is now well documented is that the global financial crisis did not immediately alter the direction of these banks as risk-loving institutions. In some respects, and particularly considering how risky the environment had become, the banks became even more aggressive in their endeavours to explore new planets in this galaxy – in other words, to make more money.
***
‘Alexis is on fire!’ a senior manager strolling past my desk shouted once, the day after what had been a very profitable trading day. His voice was loud enough for me to feel an immense sense of pride, but perhaps it was also intended as a warning to those who were having a ‘bad run’.
‘Is there anything you need?’ he asked.
Perplexed by this sudden attention from someone high up in the hierarchy, I simply mumbled: ‘Well, my computer is a bit slow.’
When I came in the next morning I was met by engineers and IT staff who were crawling under my desk to upgrade my hardware. Ignoring any potential envy from others, I could only be thankful for such a completely non-bureaucratic act of generosity. I
had asked for a few extra milliseconds of computer speed, and this was exactly what I had got. But there was another side of the coin, of course – I would not be able to complain about computer speed again. I had been given extra fuel to trade more and faster, and that advantage came with an expectation to deliver accordingly. I was beginning to feel like an astronaut sent further and further into space – enthusiastic about the mission, but increasingly unsure whether I would ever return.
Trading requires you to stretch yourself to the limits of your ability and test the boundaries of these limits. The stress can be difficult, of course, but at the same time there is a certain logic and predictability to it – you know exactly where the pressure is coming from. There is also a great deal of uncertainty involved, things that are beyond your control. But you are not really seeking these dangers when you are a trader. It is more like volunteering to serve in a war zone while constantly trying to avoid the fatal bullet. Banks need professionals who want to serve in these ‘war zones’ but who also have a natural survival instinct. Bonuses often form a significant part of a trader’s compensation, as a key incentive, even though they tend to be paid out ‘only’ once a year. Although it could be argued that an aggressive bonus culture can result in reckless risk taking, more significant in my opinion is that the risk taking itself can lead to sensations of achievement and thrill impossible to achieve otherwise. Daily, or even intra-daily, swings in profits and losses quickly become intertwined with the confidence, self-esteem, ego or arrogance of a trader. A potential bonus payment after 365 days is of less immediate importance on an individual level, although it serves to confirm that risk taking is of institutional importance – whether the risk is taken because you are allowed to, encouraged to or pressured to. I was never forced to become a trader, and never forced to take risk. I did so voluntarily.
Rogue trading is, among other things, about risk and about breaking risk limits. I didn’t break any risk limits that were imposed upon me, or that I was made aware of. That, however, does not make me innocent. Likewise, many traders caught up in the FX and LIBOR scandals might not have broken any written rules or existing laws while working for their banks. Some of them might even have followed instructions from more senior staff.
Guilty or not guilty, however, a different choice could always have been made along the way.
CHAPTER 8
THE PERFECT STORM
In 2009, I went through a phase when I believed I had not only thrown away a promising career, but also that I had wasted 15 years of my life on something that was completely useless. I could have chosen a different path, but instead I became a trader. I could, at any moment during those 15 years, have walked out the door. But instead, I stayed. I sailed on.
When people I meet today ask how I look back on 2009, what I learned from the experience, if I have any top tips on how to become a trader, or what I think should be done about trading and banking in general, I say there are no easy answers to any of those questions.
In many ways, I got caught up in the perfect storm. I was the wrong person in the wrong place at the wrong time. But so did many traders involved in LIBOR and FX. The financial crisis was never the true cause of anything that happened to me or anything else mentioned in this book. The crisis, however, acted as a trigger by laying many things bare, including some of the dark sides of the world of finance.
When thinking about a good way to respond, I sometimes wonder what you would tell a person wishing to learn how to sail and explore the oceans. What do you tell him or her? What kind of guarantees can you give that it will be safe? The seas can be dangerous, so you need to learn a variety of things related to sailing: rules, licences, engineering, meteorology, navigation, how to use a barometer and so on. Many of these things can be learned from textbooks and further knowledge can be obtained from sailors who have successfully navigated both calm and rough seas.
But there will always be some things that cannot be taught. If you end up in a perfect storm, the boat has sunk and you suddenly have a fear of drowning, you just have to trust your instinct. As difficult as it is to teach someone to become a trader (or warn someone off becoming one), it is necessary in order to make the world of trading safe for those involved in it and those affected by it.
***
I sometimes have to pinch myself when I think about how much the perception of the markets in which I was actively trading for 15 years has changed in recent years. They used to be seen as virtually flawless – how could manipulative, abusive and collusive practices exist in such immensely competitive, efficient and liquid markets? Now, they are symbolic of banking and trading behaviour gone very wrong. Yes, the markets could be volatile, but the diabolical waves weren’t seen to be caused by the huge cargo ships cruising the ocean. The largest market on the planet was infected by malpractice. The most important benchmark in the world was rigged. Other markets, benchmarks on markets, derivatives on benchmarks on markets, or even benchmarks on derivatives on benchmarks on markets (such as the so-called ISDAfix), were subject to manipulation or conspiratorial behaviour.
It could be argued that only ‘sophisticated’ traders, investors, fund managers and multinational corporations that traded financial derivatives or foreign exchange contracts on a daily basis were really impacted. After all, the vast majority of turnover in these markets takes place between banks, or between banks and large institutions. They were the ones opting to go to sea.
But because the prices and numbers affected had a direct link to money and banks, and because money and banks are such an integral part of our society, the list of people affected is longer than one might initially think. Mortgages and bonds held by pension funds have been affected, as have student loans and credit card debt. Indirectly, it goes even further. It has affected valuation methods relating to accounting and trading portfolios, tax, risk management and central bank policy. The level of interest rates and the value of currencies affect us all, not least given how interconnected the international financial system has become. That is why the issue has had consequences far beyond the few dozen traders and banks directly involved in the scandals. The waves have grown larger and larger, reaching those on land – most of whom were completely unaware of what was going on out at sea, let alone inside the vessels causing the tsunami.
As a direct consequence of the LIBOR and FX scandals, regulators and policy makers have attempted to establish ‘correctness’ in the way important financial benchmarks are generated. Although, as we know, benchmarks are not and cannot be markets in themselves, some of them have been made to ‘look’ more like markets. For instance, the time window for calculating the WM/Reuters 4 p.m. London closing spot rate has been widened from one to five minutes. By including more trade and order data, the fixing not only becomes more difficult to manipulate, but it also captures more of what is actually going on in the market during any particular day.1 The widely used FX benchmark is still not a market per se, but is seemingly a better reflection of a market.
Not all benchmarks are based on actual transactions, with LIBOR being the prime example. According to new rules, however, if there is an underlying market out there, such data shall be used ‘if available and appropriate’.2 Banks are still very reluctant to lend to each other for longer maturities, or indeed to the wider economy. Acknowledging that the underlying market might be illiquid or even non-existent, provisions have instead been made that allow LIBOR banks to base their submissions not only on traditional borrowing and lending activities between banks, but also upon financial contracts in related markets, such as interest rate futures, interest rates swaps, forward rate agreements, FX swaps and OISs.3 In a worst-case scenario, such as during periods of ‘market turmoil and inactivity when inter-bank offers are absent’, banks may even use their so-called ‘expert judgement’ when submitting their LIBOR quotes.4 Several currencies and maturities have also been removed from the LIBOR fixing mechanism altogether.5 For instance, there is no nine-month US dollar LIBOR any longe
r. Nor are there any LIBORs linked to the Canadian dollar or the Swedish krona, which, instead, have kept their domestic benchmarks (CDOR and STIBOR).
In sum, these benchmarks have been made to appear more market-like, but no change has been made to the definition of what they are. The LIBOR definition remains exactly the same as it used to be, and the new rules hardly challenge its existence. On the contrary, making the process more formal and robust will probably only serve to justify and encourage its further use. In a sense, LIBOR, like the large banks that are part of the panels setting it, has been deemed ‘too big to fail’. Overall, these measures should be seen as steps in the right direction – but only as long as the process is moving towards greater transparency. A pair of 3D glasses might make a film more realistic. However, it will not make it real.
***
The perception of the industry has also changed at a more micro level. LIBOR and FX manipulation, rogue trading and other scandals have been used as illustrations of how the banking culture has changed, increasingly becoming fertile soil for ‘rotten apples’. Some argue that it is simply a matter of cutting off the diseased branches of a tree. After all, it sometimes appears as if junior traders and bank employees have almost single-handedly caused tremendous damage to the banks and to faith in the financial system. Others argue that the true problems lie in the soil, that breaking the law, bending the rules or taking excessive risk is something that relates to the environment in which traders work. That it is all about perverse incentive structures, the lack of regulation and controls, managers’ desire to push traders to the limit, or the erosion of a decent ‘culture’ in the City or Wall Street.
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