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Michael Ridpath 2004
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It
didn't take much to wipe twenty billion dollars off the world's bond
markets. Just a small sentence. A few words transmitted simultaneously
onto every screen in every dealing room round the world: '12 April 14.46
GMT.
Fed Chairman Alan Greenspan warns that US interest rates
are "abnormally low" and will move up shortly.'The announcement was
met by an assortment of cries from around the dealing room, ranging
from the hysterical 'Christ, did you see that?' to the angry 'What the
hell is he playing at?' to the quietly groaned 'Oh shit.'
I put my head in my hands and counted to ten. I looked up.
The message was still there. The panic started.
People shouted into phones, and shouted at each other. Etienne,
Harrison Brothers' head of trading, and my boss, screamed at the futures
trader to sell anything he could at any price. The phone boards flashed
like discotheques, as customers called to sell, sell, sell. Salesmen
held their hands over mouthpieces and shouted to their traders, demanding
to know what prices they would pay for their customers' bonds. The traders
weren't interested. They had their own long positions to get rid of
first.
Etienne paused for a moment to look around him. He caught
my eye. 'How are your positions, Mark?'
I straightened up. 'Not so good,' I said.
A look verging on triumph flitted across Etienne's face and was gone
as he turned to deal with the chaos behind him.
I was furious with myself. Only that morning he and I had
argued at the daily meeting about the likelihood of a change in Fed
interest rate policy. He had insisted that we should not lighten up
our positions, he was convinced that the bond market rally would continue.
I had disagreed. I planned to spend the next couple of days making sure
my positions were fully hedged against a rise in interest rates.
I had made plans, but I hadn't done anything. Now I was
caught long and badly wrong.
For the last two years interest rates had fallen month after
month. Bond prices had risen month after month. It was easy to make
money; the more bonds you owned, the more money you made. Harrison Brothers
had made record profits last year from just such a strategy, as had
most of the other large American investment banks in the market. But
now that the US Federal Reserve had announced that it would be raising
interest rates, there would be carnage. Bond prices would fall, and
then fall some more as people sold to protect their profits, to hedge
their positions, or just through a mixture of fear and panic.
I had seen it coming and I had done nothing. How could I
have been so stupid?
'What do we do?' Ed Bayliss looked up at me through the
thick lenses of his glasses. He was clinging on to his cup of coffee
for dear life. This is the first true market panic he has seen, I thought.
Recently out of the training programme, he had been assigned to help
me trade the London office's proprietary book three months ago. It was
an important job: we were responsible for placing Harrison Brothers'
own bets in the bond market. Ed lacked experience, but he was bright
and learned fast. In normal times I found him extremely helpful. I wondered
how he would cope under pressure. I was going to find out.
'Work out how much we've dropped.'
I checked my screens. The initial panic was turning into
a rout. The thirty-year US treasury bond, known as the 'long bond',
was already off nearly two points. I looked over at Greg, our treasury
trader. I knew he had a hundred and twenty million dollar long bond
position; he had lost two million dollars on that alone. He was furiously
working the phones, trying to sell some of his bonds to other traders
in the street. The German, French and British bond markets were also
sharply down. There was no doubt that the market had been surprised
by this one.
'We're two point four million dollars down on last night's
revaluation,' Ed said.
Two point four million! Almost two months' profits gone in ten minutes.
I allowed myself thirty seconds to curse my own stupidity, the market,
Alan Greenspan, Ed, and my own stupidity again. I needed to get it out
of my system. To clear my head. To figure out what to do next.
'What now?' asked Ed, his face wrought with anxiety.
I realised I hadn't answered Ed's question. 'We don't panic,'
I said. 'In all this turmoil, some bonds are bound to get out of line.
If we see anything that gets too cheap, we pounce.'
That was easy to say, difficult to carry out in practice.
We were responsible for looking for opportunities across all the bond
markets, and with prices moving wildly in each of them, it was difficult
to pin any of them down.
I felt, as much as saw, Bob Forrester at my shoulder. Bob
was a big, broad-shouldered American in his forties, who was in charge
of Harrison Brothers' London Office. He had been a trader himself, a
very successful one. The announcement on his Reuters screen had sent
him rushing down to the trading floor. He looked concerned. He knew
exactly how large Harrison's positions were at the close of business
last night. Even so, he watched the scenes of panic in front of him
with disapproval.
'You all right Mark?' he asked in his gruff voice.
I turned to meet his eye. 'We took a bit of a hit,' I answered
coolly. 'But there have to be some good opportunities out there. We'll
make it back.'
Bob looked at me for a moment. He had been where I was now
a dozen times before. 'Good kid,' he said, patting my shoulder, and
strode over to where Etienne was exhorting Greg to dump his position.
Etienne was given to brilliance on some days, hysteria on others. This
was one of the others, and it was infectious. Bob had presence, and
that presence was just what was needed to calm the floor down.
To work. I examined the screens full of prices and yields
in front of me, looking for opportunities. I tried a couple of ideas,
but by the time I had checked each one, the prices had moved. This was
not going to work.
I glanced over to Ed, who was involved in a similarly fruitless
struggle next to me. 'Shall we try Bondscape?'
'What, live?'
'Yes, live. I think we've done enough dry runs. You can't
practise for ever. And it's the only way we have of quickly making sense
of this market.'
'But we haven't ported the software yet.'
'Sod that. Let's just pick up the computer and plug it in.
We haven't got time for any fancy stuff.'
Bondscape was a completely new computer system for analysing
the bond markets. It used 'virtual reality', a computer technology that
allows a user to feel that he is actually inside a computer-generated
virtual world. Bondscape was brilliant. It had been developed by Richard
Fairfax. Richard was my brother.
Ed and I went down one floor to Information Services, this
year's name for the computer department. There I grabbed one of the
computer analysts, and persuaded him to help me physically pick up the
Bondscape system and carry it up to the trading room. It was heavy,
and there were lots of wires, plugs and bits and pieces, but within
ten minutes we had it all plugged in and ready to go. The rest of the
trading floor were too absorbed in what they were doing to notice us.
I sat in my chair with the Bondscape computer beside me.
I picked up the 'wand', a six inch pointer with a couple of buttons
on the handle. I put on the headset. It wasn't much larger than a pair
of sunglasses, but instead of lenses in each eye, there were two liquid
crystal displays, like tiny television sets. As I strapped the clasp
round the back of my head, I entered a completely new world.
Before me, a landscape of rolling green hills stretched
away to brown and then grey mountainsides. The hills were dotted with
clusters of buildings of different sizes and colours, and with national
flags. The whole landscape was shifting gently. An eagle flapped lazily
over a group of tall buildings, halfway up the hillside.
I was looking at a representation of the world's bond markets.
The hillside was made up of a series of ridges. Each ridge represented
a bond market; the higher the ridge, the higher the yield. The plains
in the foreground represented the Japanese market with yields of only
4%, rising through America, Germany, France and the UK, to Italy towering
in the background at a yield of 9%. The hillside also sloped up from
left to right, with the shorter maturity, lower yielding bonds to the
left, and the longer maturity, higher yielding bonds to the right. By
looking at the landscape, it was possible to see immediately how the
yields in the different markets related to each other.
At the foot of the hills was a clock tower. I waved the pointer in front
of my eyes. In my virtual world, I could see a wand move over the landscape.
I pointed it at the clocktower, and with a few clicks, I had moved the
time back over an hour to 14.40 GMT, a few minutes before the announcement.
I then pressed the fast forward icon and watched.
For the first few seconds, representing the first few minutes of real
time, everything was still. Then suddenly the hillside began to heave
and buckle. First one ridge, and then another moved upwards, as the
whole landscape rose, reflecting the sudden rise in yields and fall
in bond prices all round the world.
Something caught my eye. I ran over the sequence again.
It seemed to me that the section representing the French market had
moved up more than those around it.
So I pointed to the tricolour, waving precariously on the side of the
hill, zoomed down to land beside it, and rewound the simulation. We
were back at 14.40 GMT. The German and American markets were along ridges
just below me, and the Dutch and British markets were farther up the
hill above me. I played the sequence through. As the clock ticked through
14.46, I had the sensation of being suddenly thrust up into the air.
The ridges above and below, were moving as well, but not as much as
mine. In particular, the portion of the French ridge that represented
the five-year maturity was moving up fast.
'French five-years are dead cheap, check them out!' I snapped
to Ed.
'OK,' he said. A pause. I couldn't see what he was doing
in the real world, but I could hear the click of his keyboard as he
checked prices on his screen. He pressed the intercom, and got through
to Harrison's French bond trader in Paris. 'Philippe, it's Ed in London.
What's happening in the five-years?'
Philippe sounded harassed. 'I don't know. It's crazy. There
is a big seller through BGL. Why they are selling I don't know. I would
buy some if I could, but my position is too big already.'
'Thanks,' said Ed. 'Did you get that?' I heard him ask me.
'Yes,' I said. BGL was a big Swiss bank, which was not known
for its sophistication in the markets. They were probably just panicking.
'Now we just have to work out which bonds to buy.'
Each building on the hillside represented a particular bond
issue. Once again, the height of the building represented the yield,
the higher the building, the higher the yield. The idea was to buy a
bond whose yield had suddenly increased in the market turmoil for no
good reason.
I rewound the simulation and stood right in the middle of
a cluster of buildings in the five-year segment of the ridge. I pressed
fast forward again and watched closely. Once again, at 14.46 GMT, I
could see, and almost feel, the earth underneath me move upwards. This
time, I focused on the buildings around me. They shook, some growing
taller, and some smaller. There was one to my right, which had been
one of the shortest, but was now thrusting upwards to become several
stories in height, a mini-skyscraper. It had the Renault logo on its
side. I pointed to the door and clicked. The words 'Renault 6% 1999'
loomed large.
'The yield on the new Renault has shot up. See if you can
get some of that,' I said.
'How much?' asked Ed.
'A hundred million francs should do if you can get them.'
'OK.' I heard Ed on the squawk box with the traders in Paris,
asking them to buy the bonds for us. Within a minute our order was filled.
I watched, entranced, as the building shuddered, and collapsed a couple
of stories. Our purchase had already affected the price of the Renault
bonds, and Bondscape picked it up.
'Done,' said Ed. 'What do we sell?'
My next task was to scour the hillside for bonds that were too expensive.
I had to be quick. I didn't want the market to fall further before we
had sold something.
'I'll try the eagle,' I said. The eagle was what is known
as an intelligent software agent, which can be programmed to search
data according to certain criteria. With a couple of clicks, I asked
the eagle to find me bonds that had become significantly more expensive
in the last two hours.
The eagle flew swiftly a short way up the hillside to circle
the Dutch flag. I followed it. It was hovering over a five-year Dutch
government bond, which had created a hole in the ground because it had
such a low yield.
'OK, Ed, I've found one. Sell the Dutch Treasury seven and
a halves of ninety-nine!'
'Right,' said Ed. Within thirty seconds he had completed
the trade.
Encouraged, I continued my search of the landscape. The
whole time I was doing this, I was talking to Ed, making sure that the
real world tallied with the virtual one all around me.'Earth to space
cadet. Earth to space cadet. Come in please!'
I flipped up the virtual glasses, to see the tall figure
of Greg strolling towards me, carrying a cup of coffee. The cuffs of
his sleeves were rolled up once to reveal his wrists, and his yellow
tie had dropped half an inch to show an undone top button. But he still
looked calm and relaxed.
'What are you doing, Mark? Checking out the futures market
on Alpha Centauri? I'm a seller, by the way.'
I grinned at him. Originally from New Jersey, Greg had been
in London for two years now. We had become good friends.
'Do you want to take a look at Bonds?' I asked him. By that,
I meant the US government bond market, where Greg plied his trade.
'Hey, that's a horror movie. Blood and guts everywhere.
Haven't you got something with a bit more class?'
'Shut up and put these on. You need all the help you can
get.'
Greg sighed. 'You're right there.' He picked up the second
set of virtual glasses.
I took him to the part of the mountain that showed the long-term
US government bonds. On normal days, this would be a smooth, gentle
slope, scattered with similar one-storey bungalows. Today it looked
more like a Tuscan hill town, a jumble of buildings of different sizes
and shapes, perched on a jagged hillside.
'What a mess!' Greg said. I showed him how Bondscape worked.
He picked it up quickly. He was able to explain away many of the anomalies
with such comments as 'No wonder the nine-and-a-halves look so expensive
They all got stripped years ago!'
Greg knew the relationships of all the bonds he traded intimately. It
was by placing himself actually on one of the buildings representing
a bond, and fast forwarding through time, that he was able to see a
change in these familiar relationships. 'The eights of Novie twenty-one!'
he said at last. He meant the US Treasury eight per cents of November
2021. 'Those suckers just shouldn't be that cheap. I gotta go.' And
he gave me the headset, while he rushed off to buy some bonds. Knowing
Greg, it would be quite a lot of bonds.
I was just about to flip back the glasses when I saw Bob
Forrester striding towards me.
'What are you doing fucking around with toys at a time like
this?'
I had expected this. I swivelled my chair round, lifted
the headset onto my brow, and looked Bob straight in the eye. He liked
to be looked straight in the eye.
'Our positions are a mess,' I said evenly, 'And
they're getting worse.' Etienne, standing next to Bob, bridled.
Bob frowned, but he was listening. 'Of course they're a
mess! The market's shot to hell.'
I pointed to the computer. 'With this system, I can see
what the firm's long and short positions are. And they make no sense.'
'What do you mean?' growled Bob.
'For example, one trader is busy buying German government
bonds, while another is happily selling German eurobonds. It's crazy.
Sure the government bonds are cheap, but the eurobonds are cheaper.'
I had overlaid a colour scheme that shaded the buildings blue if Harrison
was long, and red if we were short. This had highlighted some ridiculous
trading in the hour and a half following Greenspan's announcement.
Bob looked to Etienne. 'Well?'
Etienne looked confused and angry. He knew I was right,
but he wasn't going to admit it. He recovered swiftly. 'This thing is
dangerous, Bob. In a market like this the best thing to do is to sell
anything you can as quickly as you can. You can't afford to spend time
mucking around with fancy machines. If the market falls again tomorrow,
those positions Greg and Mark have put on will be a problem. A big problem.'
Bob was watching him thoughtfully. 'Nothing can beat a good
trader's gut-feel, Bob. You know that.'
I was about to open my mouth in protest. With the trades
we had constructed we should be all right if the market moved either
way. Then I saw Bob's face, and kept quiet.
'I sure hope you're not just pissing away more money, kid,' growled
Bob, and he stalked off.
I re-entered Bondscape's world. Over the next hour or so,
I picked out a couple more trades to put on. Eventually, the landscape
stopped shifting, indicating that the market had calmed down, and I
took off the headset and stretched. 'How much are we down now?' I asked
Ed.
It took him a few minutes to do the calculations. 'Still
two point one million,' he said, glumly.
I rubbed my face with my hands. Shit! It took a long time
to earn two million dollars, and it had only taken an afternoon to lose
it. Why oh why hadn't I hedged my positions this morning?
Greg came over and leaned against the desk. 'How much did
you drop?'
I winced. 'Over two mill. And you?'
'A touch more. But I'll get it back. I'm long two hundred
twenty of the Novie twenty-ones.'
'Jesus! I hope you know what you're doing.'
'I do,' said Greg with a relaxed smile. 'Thanks
to that machine of yours. Was Bob impressed?'
'Not really,' I said. 'I think he prefers gut-feel to rational
thought. I hope to God those trades we put on work.'
'Don't worry,' said Greg, 'they will.' With that he went
back to his desk to tidy up.
'Are you OK, Ed?' I asked.
Ed nodded. He still had a scared look in his eye, but he
had coped well. 'That was a tough day,' I said. 'You did well.'
He smiled, and returned to the paper trail of our afternoon's
trading.
I stood up, and looked around the huge trading room. There
were nearly two hundred trading desks, in eight long rows. Bonds, foreign
exchange and equities were all traded from the same room. There were
no windows, although the walls were lined with a series of glass meeting
rooms. At the end of a turbulent day, the floor looked as though a hurricane
had hit it. Desks were cluttered with screens, computers, phones and
intercoms, and there were bits of paper everywhere. Chairs were pushedhaphazardly
between the rows of desks, and traders were milling about, stretching,
looking for a cup of coffee, chatting.
I headed over to the exit on the far side of the room. I
walked past the equity group. Harrison Brothers was mostly known for
its expertise in the bond markets, but it felt it had to have a presence
in equities. The small group sat underneath a giant ticker-board, like
an electronic frieze, giving constant updates of the prices of the thousands
of stocks quoted on the New York Stock Exchange. It was totally irrelevant
to nearly all of us, but Bob Forrester thought it gave the place a true
American investment-bank look, and besides, it allowed him to keep up
with his personal portfolio. It was of no use to the only people who
might have any professional interest, since they couldn't see it; they
were sitting directly underneath.
Another Forrester touch was the brown HB logo on every column and wall,
there to be picked out by any visiting TV cameras providing those background
shots for market reports on the news. The room had to look good.
I stopped at the water-cooler just by the exit and poured
myself a cup. The equity group, too, were all winding down after a hard
day's work. All of them except one. Karen. She was sitting on her desk,
a phone jammed between her cheek and her shoulder, her long legs resting
on her chair. Despite the day's excitement, her yellow skirt and white
silk blouse had not a wrinkle in them, and she looked as cool as she
had at seven-thirty that morning.
'Oh come on, Martin, really? You didn't!' she chuckled down
the line. I sipped my water and listened. 'Now, how many of those Wal-Mart's
do you want?'
She brushed the fine blonde hair out of her eyes, and winked
discreetly at me. She turned to the trader who was packing up to leave.
'Jack! Before you go, what's the offer on Wal-Mart?'
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