Trading Reality

© Michael Ridpath 1996

I received help in writing this book from a large number of people. I should like in particular to thank Anne Glover and her colleagues at Virtuality; Mike Bevan, editor of
VR News
; and Paul Marshall of Maxus Systems International, whose financial software was the inspiration for Bondscape.

I have occasionally used the names of real companies in this book. All their actions are fictitious.

FairSystems, Jenson Computer, Onada Industries, Harrison Brothers, Banque de Genève et Lausanne and Wagner Phillips are entirely fictional companies. Any similarity to any real organisations is accidental.

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:

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 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, a big, broad-shouldered American in his forties, 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 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 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. 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 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 a lens 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 four per cent, rising through America, Germany, France and the UK, to Italy towering in the background at a yield of nine per cent. 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 clock tower, 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 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 storeys 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.