Free To Trade

CHAPTER 1

I had lost half a million dollars in slightly less than half an hour and the coffee machine didn't work. This was turning into a bad day. Half a million dollars is a lot of money. And I needed a cup of coffee badly.

The day had started off well enough. A quiet Tuesday in July, at the investment management firm of De Jong & Co. Hamilton McKenzie, my boss, was out. I yawned as I reread the Financial Times's tedious descriptions of yesterday's non-events. The dealing desks around me were more than half empty; people were away either on business or on holiday. Phones and papers lay scattered across abandoned desktops. Chaos at rest. The office felt like a library, not a trading room.

I looked out of the window. The tall grey buildings of the City of London pointed silently upwards out of the listless heat of the streets below. I noticed a kestrel gliding around the upper reaches of the Mercantile Union Insurance building a hundred yards to the west. The great financial centre slumbered on. It was difficult to believe anything was happening out there.

A solitary light flashed on the telephone board in front of me. I picked up the phone. 'Yes?'

'Paul? It's Cash. It's coming. We're doing it.'

I recognised the broad New York accent of Cash Callaghan, the 'top producer' at Bloomfield Weiss, a large American investment bank. The urgency in his voice pulled me up in my chair.

'What's coming? What are you doing?'

'We're bringing the new Sweden in ten minutes. Do you want the terms?'

'Yes please.'

'OK. It's five hundred million dollars, with a coupon of 9¼ per cent. Maturity is ten years. It is offered at 99. The yield is 9.41. Got that?'

'Got it.'

The Swedes were borrowing $500 million through the means of a eurobond issue. They were using Bloomfield Weiss as underwriter. It was Bloomfield Weiss's job to sell the bonds to investors; the term 'euro' meant that it would be sold to investors all over the world. It was my job to decide whether to buy it.

'Nine forty-one per cent is a good yield,' Cash went on. 'Ten year Italy yields 9.38 and no one thinks Italy is as good as Sweden. Canada is a better comparison, and that's yielding 9.25. It's a no-brainer. This one's going to the moon, know what I'm saying? Shall I put you down for ten million?'

Cash's enthusiasm to make a sale was extreme at the best of times. When he had $500 million of bonds to sell, it knew no bounds. He had a point though. I tapped some buttons on my calculator. If the yield on the new bonds did fall to the level of Canada at 9.25 per cent, that would mean the price would move up from 99 to 100. A nice profit for any investor quick enough to buy bonds at the initial offer price. Of course if the issue was a failure, Bloomfield Weiss would have to lower the price until the yield was high enough to attract buyers.

'Hold on. I've got to think about this one.'

'OK. But be quick. And you should know we have already placed three hundred million in Tokyo.' The phone went dead as Cash rushed on to his next call.

I had very little time to gather information and make a decision. I punched out the number of David Barratt, a salesman at Harrison Brothers. I repeated what I had heard from Cash and asked David what he thought of the deal.

'I don't like it. It sounds good value, but remember how badly the World Bank issue that was launched two weeks ago did? No one's buying eurobonds at the moment. I don't think any of my clients in the UK will touch it.' David's clear unhurried tones carried the weight of experience and a sound analytical mind. He had built up a loyal following of customers by being right most of the time.

'That's very useful. Thanks,' I said, and hung up.

Another light flashed. It was Claire Duhamel, a persuasive French woman who sold bonds for Banque de Lausanne et Geneve, known as BLG.

'Hallo Paul, how is it with you? Are you ready to buy some bonds from me today?' Her low throaty accent was carefully designed to demand the attention of even the hardest-hearted customer.

That morning I had no time for Claire's line of flirtatious chat. Although she did her best to hide it, she had excellent judgement, and I needed her opinion quickly. 'What do you think of the new Sweden?'

'Bof! A dog. A howling dog. I hate the market at this moment. So do my customers. So do my traders. In fact, if you want any, I am sure they will be offering bonds very cheaply.'

She meant that her traders disliked the issue so much that they would try to sell bonds as soon as the issue was launched, in the hope that they might buy them back cheaper later.

'Bloomfield Weiss claim that most of the deal has been placed in Tokyo already.'

Claire's reply was tinged with anger. 'I'll believe that when I see it. Careful, Paul. A lot of people have lost a lot of money believing Cash Callaghan.'

For the next few minutes the board in front of me flashed constantly as salesmen called in to discuss the deal. None of them liked it.

I needed to think. I asked Karen, our assistant, to put off all the incoming calls. I liked the deal. It was true that the market was very quiet. It was also true that the World Bank issue of two weeks ago had fared poorly. However, there had been no new issues since then, and I had the feeling that investors did have cash waiting for the right bond issue. And this could be the right one. The yield was certainly attractive.

Most intriguing was the Japanese angle. If Cash was right and they really had already sold $300 million of a $500 million issue in Japan, then the deal would go very well. But should I trust Cash? Wasn't he just taking me for a sucker; a twenty-eight-year-old with only six months' experience in the bond market? What would Hamilton do if he were here?

I looked around me. I supposed I should really discuss it with Jeff Richards. He was Hamilton's deputy and responsible for the strategic view the firm took on currencies and interest rates. But he liked to do things based on thorough economic analysis. Trading a new issue was not his cup of tea at all. I looked over to his desk. He was tapping figures from a booklet of statistics into his computer. Best to leave him out of it.

Apart from Karen, the only other person who was in the office was Debbie Chater. Until recently she had been involved in the administration of the funds managed by the firm. She had only moved on to a trading desk in the last two months, and had even less experience than me. But she was sharp, and I often discussed ideas with her. She sat at the desk next to me, and had been watching what was going on with interest.

I looked at her vaguely, searching for a decision.

'I don't know what the problem is, but suicide isn't the answer,' she said. 'You look like you are about to jump out of a window.' Her broad face split into a grin.

I smiled back. 'Just thinking,' I said. I briefly explained what Cash had said about the new Sweden, and the lack of enthusiasm from his competitors for the deal.

Debbie listened closely. After a moment's thought she said, 'Well, if Cash likes it, I wouldn't touch it with the proverbial bargepole.' She tossed me a copy of the Mail. 'If you really want to gamble our clients' money away, why don't you do it on something safe like the four thirty at Kempton Park?'

I threw the paper in the bin. 'Seriously, I think there might be something in this.'

'Seriously, if Cash is involved, drop it,' she said.

'If Hamilton were here, I am sure he would get involved,' I said.

'Well, ask him. He should be back at his hotel by now.'

She was right. He had spent the day in Tokyo talking to some of the institutions whose money our firm managed. He should have finished his meetings by now.

I turned to Karen, 'Get hold of Hamilton. He's at the Imperial, I think. Hurry up.'

I still had a couple of minutes. It took Karen only one of them to track Hamilton down at his hotel.

'Hallo, Hamilton. I'm sorry to disturb your evening,' I said.

'Not at all. I was just catching up with some reading. I don't know why I bother. This so called "research" is all drivel. What's going on?'

I outlined the deal and repeated the negative comments of David, Claire and the others. I then told him what Cash had said about the Japanese.

After a few seconds' pause, I heard Hamilton's soft, calm voice with its mild Scottish intonation. Like a good malt whisky it soothed my nerves. 'Very interesting. We might have something to do here, Paul, laddie. I spoke to a couple of the life-insurance companies this morning. They both said that they were worried about the stockmarket in America and have been selling shares heavily. They have several hundred million dollars to put into the bond market, but have been waiting for a big new issue so that they can buy the size they want. You know how the Japanese are; if two of them think like this, then there are probably another half dozen with the same idea.'

'So maybe Cash was telling the truth?'

'Extraordinary as it may seem, that might be the case.'

'So shall I buy ten million?'

'No.'

'No?' I didn't understand. From what Hamilton had said, it looked as though this deal was going to work.

'Buy a hundred.'

'A hundred million dollars? Are you sure? It seems an awful lot of money to invest in a deal that nobody likes. In fact it seems an awful lot of money to invest in any deal. I'm sure we don't have that much cash available.'

'Well, then sell some other bonds. Look, Paul. Just once in a while we get the chance to make some real money. This is it. Buy a hundred.'

'Right. Will you be at the hotel for the rest of the evening?'

'Yes, but I've got some work to do, so don't disturb me unless you really have to.' With that, Hamilton hung up.

Buying $100 million was a big risk. A huge risk. If we got it wrong our losses would ruin our performance for the whole year. It would be very difficult to explain this to the institutions that trusted us with their money. On the other hand, if the Japanese really had bought $300 million, and we bought $100 million, that would leave only $100 million for the rest of the world. Hamilton had a reputation for occasionally taking large calculated risks, and getting them right.

A light flashed. It was Cash.

'We are launching it now. What do you think, buddy? Do you want ten? I feel lucky on this one. Let's make some dough here!'

I felt my throat tighten as I said slowly and deliberately, 'I'll take a hundred.'

Even Cash was silenced by that one. I could just hear a whispered 'Wow!'. He put me on hold for five seconds.

'We can't do a hundred at 99. We can sell you fifty at 99 but we will have to do the second fifty at 99.20.'

I was damned if I was going to let them get away with that.

'Look. You know and I know that the rest of the market hates this deal. I just happen to like it, but only at a price of 99. It's a hundred at 99 or none at all.'

'Paul, you don't understand the way these things work. If you want to buy that many bonds, you've got to pay up for them.'

Cash's wheedling voice was irritating me.

'A hundred at 99 or you have a dog on your hands.'

A pause. Then, 'OK, you're done. We sell you one hundred million dollars of the new Sweden at a price of 99.'

My hand shook as I put down the phone. This was by far the biggest position I had run in my life. Betting a hundred million dollars against the opinion of the rest of the market made me more than a little nervous. My mind conjured up the awful possibilities. What if we had got it all wrong? What if we were to lose hundreds of thousands of dollars in the next few minutes? How would we explain it to Mr De Jong? How would we explain it to the institutions who trusted us with their money?

This wouldn't do. I had to banish all the what-ifs from my mind. I had to transform my brain from an emotional jumble of wild conjectures to a totally reliable calculating machine. I had to relax. I noticed that my knuckles were white as they clutched the handset of my telephone. I forced my fingers to loosen their grip.

The lines were all flashing. I picked one up. It was Claire.

'What did I tell you? A howling dog. Did you buy any?'

'We did buy some, actually, yes.'

'Oh no.' She sounded sympathetic. 'You really must be careful of that Cash. But, if you want any more, you know where to come. We are offering them at 98.90.'

'No thanks. Bye.'

So BLG was already offering bonds below the initial offering price of 99. But Claire had mentioned that they would try to sell short bonds they didn't have in the hope of buying them back later. No wonder their offer was low.

I picked up another line.

'Hi Paul, David. Have you bought any of these new Swedens?'

'A few.'

'Well, this thing is falling out of bed. We are bidding 98.75 and offering bonds at 98.80. None of my customers like it.'

Oh God. This was all going horribly wrong. The price was falling fast. At a bid price of 98.75, I was down $250,000. Should I take my loss? I remembered an old maxim, 'Cut your losses and let your profits roll.' Then I remembered another. 'If you have a view, stick with it.' Great help. Think, Paul, think.

Another line flashed. Claire again. 'This doesn't look good, I'm afraid. We are now bidding 98.50. There are sellers of bonds everywhere. This bond is only going to go down. Do you want to do anything?'

Ninety-eight fifty! My losses were now half a million dollars. A voice inside me screamed, 'Sell!' Fortunately I managed to answer in a quiet, hoarse voice, 'No, nothing right now, thank you.'

I called Bloomfield Weiss. Cash answered.

'What's going wrong with this deal? I thought you had placed most of it?' I asked, just winning the struggle to keep my voice below a shout.

'Relax, Paul. We sold the three hundred million into Japan. We sold you a hundred million. We sold an American fifty million. And we just bought about fifty million from the other dealers. That makes five hundred million. There are no other bonds around.'

I could have screamed at him. I could have shouted foul abuse at the telephone. But I didn't. I just murmured goodbye.

I felt cheated, betrayed. Worst of all I felt stupid. Anyone can read a market wrong. Only a fool would trust a hundred million dollars to Cash Callaghan. He hadn't even admitted his lie when the collapse of the bonds had shown it up for what it was. I tried to call Hamilton in Tokyo, but couldn't reach him. I left Karen to keep trying whilst I tried to work out the best way to limit the damage of this mess.

During all this I had been totally absorbed in the world at the other end of the telephone. For the first time I looked up to see Debbie watching me. She had been following everything. The smile that always seemed a second away from her lips was nowhere to be seen. Her face was concerned.

'What was that you said about jumping out of a window?' I said, struggling to keep my voice steady.

She forced a brief smile and then the worried look reappeared.

'Any ideas?' I asked.

Debbie frowned for a moment. It was wrong of me to ask her. There was no magic solution to this problem, and I couldn't shift the burden of responsibility for such an enormous cock-up on to her. But as she paused, I found myself daring to hope that she would point out a simple solution that I had overlooked.

'You could sell,' she said.

I could sell. And lose half a million dollars. And maybe my job. Or I could do nothing and risk losing more.

I developed a sudden craving for a cup of coffee to help me think, or at least to occupy my hands with something. I stood up and walked over to the corner of the trading room where a machine dispensed 'real' filtered coffee. It tasted worse than instant, but was strong on caffeine. I pressed a button and pulled a lever. Nothing. I banged the machine with the side of my hand. Still nothing. I kicked the base of the machine hard, and deriving some satisfaction from the small dent that appeared, stalked back to my desk.

Think! If Cash had lied, which seemed most likely, then there would be a lot of unsold bonds for sale, and the price would not move up for a while. But at a price of 98.5 the bonds now yielded 9.49 per cent, which was more than any other eurobond of similar quality. In time they would trade back up in price. If Cash had lied, I shouldn't sell, but should hang on. With patience I should be able to recoup my losses and maybe even make a profit.

What if Cash had not lied? What if all the other dealers were wrong? What if Bloomfield Weiss really had sold $300 million of the issue into Japan? Then, once the other dealers had realised their mistake, they would be forced to cover their shorts, in other words buy back the bonds they had sold short earlier. The price would scream upwards. There would be a fortune to be made for anyone brave enough to buy more bonds now.

The more I thought about it, the more possible it seemed that Cash was telling the truth. I didn't trust him, but I did trust Hamilton. If Hamilton believed the Japanese would buy an attractive new issue, there was a strong probability that they had. How could I tell who was right?

I had an idea. It was an enormous risk, but the pay-off would be big if it worked. I had no time to check it with Hamilton. If it was going to work I would have to act now.

I rang Cash. My heart rapped half a dozen times in the second it took him to answer the phone.

'I'd like to buy another fifty million if the price is right.' I was amazed at how steady my voice sounded.

Cash laughed, 'Way to go, Paul! Let's make some money here! Hang on.'

That didn't tell me anything. More sales meant more commission for the salesman. Cash, at least, would be making money. The real test would be when Cash came back with a price. If there were still millions of the bonds to sell, then he would be right back with a cheap offer. In that case I would have a fight on my hands to wriggle out of my purchase. If they really had sold the whole issue, then there would be lots of excuses and a higher offer.

I hung on for what was probably only a minute, but seemed like ten. Finally Cash came back on the other end of the phone.

'I'm sorry about this. I'm afraid we can only manage ten million, and then only at a price of 99.'

I could tell from Cash's voice he was expecting protests from me for offering fewer bonds than I wanted at a price half a point above his competitors' offer. He didn't get any. I wasn't angry. Here was an opportunity and I was going to make the most of it.

'OK, I'll take ten at 99.'

I had to move fast. Next call was to Claire.

'Are you are still anxious to sell the new Sweden?' I asked.

'Oh, but yes of course,' she purred. 'I can get you some at 98.50.'

'Fine. I'll buy twenty.'

After two more phone calls I had managed to buy another $15 million at 98.60. That took my total holding to $145 million. I sat back and waited. I still felt tense, but this was the tension of the hunter, not the hunted.

It didn't take long. Within two minutes the lights began to flash with dealers bidding for bonds. Their bids rose from 98.60 to 98.75 to 98.90. Then David Barratt called.

'I'd like to buy twenty million of those Swedens at 99.10,' he said.

'That's a very high price for a bond with such limited prospects,' I teased him, unable to keep the euphoria out of my voice.

'It's a funny thing,' he said. 'The price fell as I thought it would. Then someone somewhere bought some bonds. Since then the dealers have been scrambling to cover their shorts, but haven't been able to find bonds anywhere. So they have driven the price up. The really funny thing is that a couple of my English clients who have been sitting on their hands for a month have just taken it into their heads to buy. They think the bond has value, and the rapid run up in price makes them afraid they might miss a move up in the whole market.'

I sold David $20 million and unloaded a further $75 million over the rest of the day. Claire had been especially imploring. BLG had lost a lot on that one. I decided to keep $50 million on the basis that it could move up further over the next week or two, and sold some other bonds to raise cash for the purchase. I totted up my profits. I had realised nearly $400,000 profit over the day, and had unrealised profits of $300,000 on the remaining $50 million.

I slumped back in my chair. I felt drained. It was as if I had been physically beaten up. The tension, the adrenalin, the sweat of the last few hours had left me limp. But I had got it right. In a big way. No matter what Hamilton might say, he couldn't deny that. For the first time in my life, I knew what it felt like to take on the market and win. And it felt good. I had shown myself that I could be a good trader, as good as the best. I hoped I had shown Hamilton too.

'Come on, smug features,' Debbie interrupted. 'If you have any more afternoons of successful spivving, let me know. I am sure the second-hand car business would give anything for one as talented as yourself. In the meantime, why don't you buy me a drink?'

'How come I always get to buy the drinks? Don't they pay you a salary here?' I said, putting on my jacket.

I had a thought. 'Just a moment, I have got to make one more phone call.'

I dialled the Imperial Hotel. When I asked for Hamilton McKenzie the operator told me he had left a message specifically asking not to be disturbed. I marvelled at the man's coolness. So much at stake, and he had deliberately taken steps to avoid hearing about the outcome. He had enough confidence in me to let me handle it by myself. As usual, he had been right.

With my smug look intact, I switched off the machines and followed Debbie to the lifts, leaving Jeff still engrossed in his statistics.