Pressure, Rewards High : Currency Trade: Risky Business
The day a gunman shot Ronald Reagan remains one of the most frightening in Varick Martin’s memory, and not entirely because of Martin’s tender feelings for the President.
The fact was, currency-trader Martin had contracts to swap 65 million German marks for U.S. currency in two days, a transaction that he expected to bring about $30 million. But if the President died, the dollar’s value might have dropped several percent, instantly wiping out several hundred thousand dollars in the contracts’ value.
“I needed more than Maalox, you can imagine,” said Martin, a pipe-smoking trader with Merrill Lynch Capital Markets, who works in rolled-up sleeves and flapping shirt tail.
Receives Inside Tip
Fortunately, not only did the President recover, but Martin was tipped by a source at the Washington Hospital Center that Reagan’s condition had quickly stabilized. The information gave him an edge on others in the market, and he made new contracts that earned the bank about $250,000 as the dollar strengthened the following day.
Such near-cataclysms may not be daily events in Martin’s line of work, but each month has its share of minor calamities. The currency market is as volatile as any, and regular crises make Martin’s job among the highest-pressure, highest-risk jobs in the financial world.
Jobs like his also have high visibility, as was evident on Sept. 22, when finance chiefs of the leading non-Communist industrial nations gathered in New York to declare their determination to lower the dollar’s value. The ministers were speaking directly, if not exclusively, to traders like Martin, whose activity can influence currency prices, at least in the short term.
Since currency prices affect the ability of countries to export and import, to attract capital and pay off international debt, the currency traders are always on the minds of world leaders. Heads of state from Richard M. Nixon to the Philippines’ Ferdinand E. Marcos have denounced them for unwarranted and damaging speculation.
Huge Profits
At the same time, company executives keep a close watch on their own traders. Currency swaps can yield huge profits or inflict heavy losses overnight. Some make or lose $1 million a day with regularity.
It is a lot of responsibility for the world’s several thousand traders, whose average age is under 30 and a good number of whom do not have college degrees.
“There aren’t many jobs in the financial world where you can make or lose a sum the size of your salary in a few minutes,” says Francoise Soares-Kemp, chief corporate trader with a New York office of Credit Lyonnais, the big French bank. “The responsibility is monstrous.” The burden has also grown in recent years as the currency market has gotten bigger and more volatile.
Its volatility increased in 1973, when the United States stopped trying to maintain a fixed value for the dollar and allowed its value to “float” against other currencies. Since then, a series of economic crises have increased its gyrations, including the oil-price rises of the 1970s, rapid inflation and the growing imbalance in world trade.
When the five powers--the United States, Britain, France, Japan and West Germany--announced recently that they would work jointly to drop the value of the dollar, it plunged 5% overnight, setting a record. But one-day swings of 4% occur regularly, making the currency business far more volatile than the stock market.
The amount of currency swapped daily has also increased as the world’s economy has grown more interconnected and as nations have removed laws that limited investors from rapidly sending their money from country to country in search of the most profitable investments.
Increased Volume
No physical currency actually changes hands between traders; bank accounts are simply credited or debited electronically. Occasionally, trading volume reaches $200 billion in a day, 10 times what it was on some days in the early 1970s. There are about 110 trading desks operating in New York, up about one-third since 1975.
As international money trading has increased, some world leaders have become more nervous about its presumed effects. In the early 1970s, President Nixon blamed money dealers for hastening the dollar’s sharp decline when the United States stopped using gold as the standard for the currency’s value.
President Marcos has also intermittently upbraided dealers for “shorting” the Philippine peso--making deals on expectations that its value will fall.
Some observers suggest that leaders’ complaints about speculation are meant to distract attention from economic policies that have far greater influence on currency values. Few economists believe traders can determine the direction of prices for more than a few weeks. Far more influential are underlying economic factors such as relative interest rates and the political and economic stability of nations.
A stable country with interest rates that are high enough to draw foreign capital is likely to have a strong currency, no matter how money traders behave.
Group of Five’s Threat
Even so, the traders command special attention. In the Sept. 22 announcement, the so-called Group of Five signaled traders that aggressive dollar purchases could pose major risks. The governments threatened to periodically flood the market with dollars and drive down its value.
While the new supply of dollars would be bought up by traders at a lower price, those who had previously purchased dollars--speculating that its value would rise--would suffer hefty losses.
And the nations have carried through on the latest threat. Their central banks--including the U.S. Federal Reserve Board--have sold hundreds of millions of dollars to depress the currency price. Now, many believe that the dollar is headed for a long-term decline.
In New York, many traders start work between 5 and 7 a.m., absorbing as much information as they can in the several hours before 8:30 a.m., when trading begins in earnest. By that hour, New York traders are on the phone to their counterparts in Europe and elsewhere in the United States offering to buy or sell U.S. dollars, German marks or Thai bahts, based on their view of how economic news and a host of other factors will move the market.
The currency market has no focus of operation, like the stock market’s trading floor, but is carried on in a ceaseless round of telephone conversations that follows the sun. “It’s a market of the airwaves,” says Martin.
Traders work amid blinking, beeping, high-tech gear that gives them access to streams of information from around the world. They sit before consoles with computer monitors that flash currency prices from money-trading desks in the United States, Europe and Asia.
Also at their fingertips are personal computers, news service terminals and panels of buttons that provide direct telephone lines to other traders. Stacked on their desks are loudspeakers that intermittently squawk prices offered by currency brokers, who act as middlemen in deals between buyers and sellers.
With technological improvements, the equipment used by a single trader costs about $50,000--perhaps twice what it cost 10 years ago, says Richard F. Mahoney, a senior trader with Midland Bank PLC, the big British bank.
“You used to need only a telephone and maybe an orange crate to sit on,” he says. But as each trading room has installed faster, more capable equipment, others have sought to keep up, triggering a sort of arms race that has given them all the look of military command posts, Mahoney says.
When prices start jumping, tranquil trading rooms are engulfed in a cacophony of shouts and blaring loudspeakers. The good trader is able to pick out the best prices from the others above the din, even if 20 prices are offered at once.
Importance of Hearing
“Around here, your hearing is more important than your sight,” says Mahoney.
Decisiveness is also prized, because a trader cannot hesitate in choosing prices or deciding when to bail out of an investment position.
Martin says one major New York bank takes job candidates to lunch to determine if they have what it takes to operate on the trading desk. Job seekers who linger over the menu, asking, for instance, “Are the snow peas fresh?” or “How do you prepare the cote de veau ?” are politely told to find another line of work.
But those who clap the menu closed and say something like, “I’ll take a cheeseburger,” may be offered a job.
High Salaries
Salaries in the business average about $65,000, traders say, but the best-paid traders may earn several hundred thousand dollars.
On Martin’s single best trading day, he earned about $1 million for his bank. He has lost sums of $250,000 to $350,000 on many other days, he says.
Now a vice president, 40-year-old Martin earned a law degree but, deciding that the legal profession would not hold his attention, became what he calls “the world’s youngest retired member of the Pennsylvania bar.”
He was drawn by the glamour of international banking, he says, and is still thrilled by trading’s pace and risk.
Yet the dealing floor’s pressures produce a regular stream of professional burnouts, and most traders who have not been promoted to managerial positions leave by the time they are 40 years old.
The hours of the job contribute to its pressures. Many traders stay in touch overnight with the Asian markets, which open at 6 p.m. EDT, and the European, which opens at 3 a.m.
Midland Bank’s Mahoney held a job for five years at which he was called four times in the course of the night. Even now, on special occasions the calls come more frequently.
In 1980, on the night of the aborted U.S. attempt to rescue the hostages in Iran, Mahoney was called every 15 minutes through most of the night.
How did his wife feel about this? “What can I say that’s printable?” he wonders.
Big Risks for Banks
Naturally, money trading can also carry big risks for banks. Last year, the trade was startled to learn that the New York money-dealing operation of Fuji Bank, Japan’s second largest, had lost $48 million over a four-month period when its chief trader made contracts that committed far more money than was authorized.
Expecting the dollar’s value to fall, the official arranged to sell dollars and yen at a fixed future date, betting that he would earn a huge profit when he repurchased the dollars for fewer yen.
The messiness of such rapid gains and losses often gives trading rooms a far different culture from other parts of their parent bank. “The bankers who run the organization are out there making these elegant, orderly deals, and then they go into the trading room and the chief trader tells them, ‘We’ve lost $2 million in the last hour,’ ” says Credit Lyonnais’ Soares-Kemp. “They can find it a little hard to understand.”
Traders describe their business as predatory, pointing out that for every trader who profits there must be one who loses money. “Traders aren’t paranoid--there really are people after them,” said Martin.
Cultivate Trust
Yet while they try to outmaneuver the opposition, traders must also cultivate trust. They will not deal again with a trader who gives them faulty information or violates the etiquette of the trading world.
One point of etiquette dictates that traders help each other profit from advance information about some development that might move a currency’s price.
In 1978, when French-Canadian separatist feeling was running high, Martin learned that Sun Life Assurance Co. planned to move its headquarters from French-dominated Montreal to Toronto. The news would probably be taken by the markets as a sign of Canadian economic instability and drop the value of the Canadian dollar, he guessed.
The same day, Martin was approached by a corporate official who wanted to buy $25 million in Canadian dollars. Martin told the official what he had learned and recommended that he wait a day until the news was out and the Canadian dollar was cheaper.
The trader waited and saved $100,000 when the Canadian dollar lost 1 cent’s value against the U.S. dollar. But instead of taking Martin’s offer, he accepted another that was lower than Martin’s by 2.5 thousandths of a cent for each Canadian dollar purchased--or $250 in all.
‘Killed the Golden Goose’
“He really killed the golden goose,” says Martin. “He won’t be getting another egg like that from me.”
Martin gathers such information by cultivating sources that include other traders, government officials, insiders at important companies and, occasionally, news reporters.
Traders’ styles vary greatly. Some pore over news of economic and political developments, while others lean more heavily on so-called technical analysis, which is based on analysis of the past movements of the market.
Most traders have bachelor’s degrees, and an increasing number have master’s degrees in business administration. But neither is indispensable. Some money dealers who buy and sell for immediate delivery--on the “spot” market--simply watch the moment-to-moment flow of price to judge the market’s direction.
Martin says one of the most effective traders he knows is a former clerk with a high school education who is known to traders at other banks for her profane patter.
“She talks about ‘dese,’ ‘dems’ and ‘dose,’ but she really feels the market,” he said. “In this business that will carry you a long way.”
