FAIL (the browser should render some flash content, not this).


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, 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'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 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 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?"

"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 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 my brother.


Excerpt from Trading Reality. Copyright© 1997 by Michael Ridpath. Used by arrangement with HarperCollins. All rights reserved.