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 on to 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,
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'd 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 past
two years interest rates had fallen month after month. Bond prices
had risen month after month. It had been easy to make money; the more
bonds you owned, the more money you made. Harrison Brothers' had made
record profits the previous 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 before. 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
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 realized 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, a big, broad-shouldered American in
his forties, was in charge of Harrison Brothers' London office. He
had a 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
had been at the close of business the night before. 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 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. I wasn't getting anywhere.
I glanced over to Ed, who
was involved in a similarly fruitless struggle next to me.
"Shall we try Bondscape?"
"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
Bondscape was a completely
new computer system for analyzing 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
Excerpt from Trading Reality. Copyright©
1997 by Michael Ridpath. Used by arrangement with HarperCollins. All