Tales from the trading desk - 'My size is not your size'
Do you know I am often tempted to write a book about my days as a broker.
I thought I would regale you with a tale of derring do and how I dismantled a market over the course of one day and probably cost a guy at Salomon Brothers his job.
It was 1995 or 1996 the exact year evades me as basically it is in the fog of time. I was working at Garban broking Italian government bonds. For those of you that don't know The BTP market was the 3rd largest bond market in the world back then and also the most volatile. Plus it was like Pirates of the Caribbean every day with everyone trying to have each others pants down to make money.
The most stable area to trade was something called BTP basis. Bonds vs the 10 year notional future calculated against a set borrowing/lending 'repo' rate. This market was in scottish vernacular as boring as mince. It priced normally something like .01 - .015 in 20 billion lira and virtually stayed there all day. Because of this the big market makers used to like being in it and you could at a maximum get ticket sizes of up to 50 billion done where the normal trade sizes on the curve would be 5-10 at a time.
I tended to stay away from it as I like the cut and thrust of curve plays and found it extremely boring. It never moved.
One of my best clients called me on my mobile and said 'Don we are going to have some fun today BTP Jan 14 basis go and check it please' Tony was a complete boffin but a superb trader. He was at the time working in a hedge fund and liked to smash it about in Italy because of the yields and volatility.
Unsurprisingly it was .01 -.015. He laid out the sketch for me. He had somehow managed to corner all the 3 month repo rates for the bond (basically there would be no supply to borrow if anyone came looking after the fact) and had calculated he could make profit in the basis all the way up to .18. For a market that never moved this would be one of the biggest trades ever done to get it there. It was illegal to go short of BTPs and you had to deliver them on settlement day or face huge Banca D'Italia fines.
I was given the order 'buy it until you get nervous, buy as many as you can and dont stop until it is at least .14 bid'. It was at moment like this I used to put my phone down and look at my colleagues quietly before the storm and know how much fun I was going to have. A key point in all this is that I had to put the client first in this. The moment the 12 man desk knew what I was about to do the market would be ruined as they would give away the trade. Brokers were reknowned for giving away deal info to their strong clients.
I started to buy.
It was such a loud desk you had to scream to get attention. And given I normally didn't touch the basis my colleagues shouted the two way back at me like an afterthought.
I tried bidding it in the middle at .0125 and got given 25 billion. I think this was the low of the next 3 months and something I am sure that trader regretted for the rest of his time. I then said 'OK I might look for a few more can we see how many the offer might stand for' The desk alarm bells were still not ringing - I was doing my job.
I think in all I managed to get another 170 billion in at .015. If you imagine the normal trading size was 5 billion and basis usually around 20 billion you get the picture of how hard it is to get size done.
I did what any broker with an enormous order to corner a market would do in this situation. I went for a full english breakfast. Part of the psychology of trading for me is never to look to keen. If you are like a dog chasing a ball everyone will notice.
Coming back after half an hour I asked 'How is it left by the way me asking?' This was one of my favourite tools of protecting my orders. It didnt look to anyone that my client was back for more. I was just checking the levels. Weirdly since I had gone off the desk a couple of main market makers had come back in offering at .015. I bought another 60 billion.
Salomon Brothers then came on the box asking what exactly we were up to. I had started to get attention. I said to the guy covering them that it was a new guy coming to the market who wanted to get a bit involved. I won't name the Salomon guy but they were the largest and most arrogant market maker in BTPs.
'Show him his size at .02' was his comment. This is probably one of the stupidest things a trader will ever do. The term 'my size is your size' was used by larger houses as a way of bullying others. A sort of pissing contest.
Now the desk started to pay attention. At this point you have to be a sort of poker player with your colleagues. Overcocky will ruin an order as will opening up to them. I at this point hadn't picked up a phone to Tony throughout any of this. I now pretended to get on the phone. It was funny acting out a conversation to a dead line - quite shakespearean really. Putting the phone down I said to the broker 'if you can make it 250 billion I will do it'
Here is where psychology wins. The Salomon guy was an idiot for facing me down. He now by market convention had to do the trade. I bought the 250 billion and said there was a chance I might try for a bit more.
In the course of an hour I had managed to buy 500 billion in a market where 100 billion in one day was considered active.
Market makers were now all jumping in the lines to check what was happening. I sat there quietly fielding their brokers with the reply 'Mate I have no idea what he is doing he just said he had a care'
I got in another 200 billion over the next hour from .0175 to .025 by saying the client wanted to average in. Salomon came back and said fiercely he could do another 250 at .03. I actually felt sorry for the guy, he had no idea what was coming. I lifted him and went .03 bid to everyone. The whole trading floor was now starting to watch this trade.
Long story short I hoovered every possible bond up over the course of the next hour and a half. I got a bit bored at one point and sold 10 billion for a laugh just to mix it up a bit. The bond ended up 0.15- 0.18 exactly where my client wanted it. It was the biggest move the basis had ever seen and banks lost fortunes on it. They discovered there was no was to borrow the bonds in the repo market to cover their shorts to me and got doubly stung on the trade. I cannot remember the final amount I managed to buy but it was record breaking and all before lunch.
The guy who sold me the bonds from Salomon left the bank shortly afterwards. I imagine I may have had something to do with it.
I felt like a guy at poker who has 5 aces - What great days those were. And the funniest thing about all of it... Not once until we got to .15 bid did I call Tony. The level of trust between client and broker for me was always the most important issue.
I saw today that Wall Street banks have had their worst six month trading period for over a decade partially due to a lack of hedge fund activity. Tony is long gone from the markets. I wonder if he ever did buy that Castle in Spain.
As a funny footnote to this Tony came from a small market town in the midlands and used to keep his many millions in his current account for a laugh. Apparently his local branch had one of the largest AUM for client accounts in the country
Don
