Ted Fishman, OUR CURRENCY IN CYBERSPACE Harper's Magazine, 0017789X, Dec94, Vol. 289, Issue 1735
[ This is an old article about money trading that struck me at the time. The volumes mentioned are sort of astonishing . Sorry, no link, text in full, 2 parts ]
Trading the American dollar against the American government
The U.S. dollar headed south last spring, right into the heat. In two mad sprints downward in May and June, our money hit postwar lows against the Japanese yen and the German mark, on some days losing as much as 1 percent of its value. The projectable trend promised disaster. Analysts invoked devaluation and Latin American-style hyper-inflation. An economist freshly hired from the Federal Reserve to work at Goldman Sachs's currency desk told me in grave tones that we could end the summer as a poor country. I pictured Japanese housewives plying Fifth Avenue with Louis Vuitton wheelbarrows full of dollars. The newspapers, purveying both doom and reassurance, simultaneously hyped the dollar's drop and played down its effects: good for U.S. exporters, bad for U.S. tourists and VCR buyers.
The news of the dollar's turbulence did not disturb me until the governments of the United States, Germany, Japan, and fourteen other rich countries tried to rescue the dollar from its free fall, proving that central bankers and financial ministers were rattled. In May and again in June, the alliance tried to beat back the money-center banks, mutual funds, and other downside speculators with a $12 billion stake in the foreign currency markets, all bet on the dollar. The gamble was backed up with tough talk from Treasury Secretary Lloyd Bentsen, but the dollar sank even further, and the currency markets seemed uncontrollable.
By late summer the. dollar had settled at about 100 yen, down from January's price of 113. (As of this writing, it stands at 97.6.) In August, Peter Fisher, the officer of the New York Federal Reserve Bank who manages the system's currency trading, reflected on the intervention's failure: "There was heavy dollar selling that we met head-on," Fisher said, as if describing an ambush. "[The government's intervention] was anticipated." The Fed reported that it devoted $2.8 billion to fighting the selling wave, a pool of money that traders profited from as the dollar sank to new lows. The sum total of our government's effort to protect its own currency, then, was to transfer millions of public dollars into the coffers of some of the richest individual and institutional currency traders in the world.
I was once a professional trader. For seven years at the Chicago Mercantile Exchange, I traded my own account. I was a small trader, though the amount of money I moved around seemed large enough to mean my biggest day I controlled $360 million. I traded everything from stock to currencies to chickens. In January 1991, however, I lost most of my trading money on a play in cattle futures. My losses occurred in the December and January before the Gulf War, with the collapse of peace talks between the United States and Iraq. The market expected the "mother of all wars," and cattle prices went berserk. I liquidated just short of ruin. Had I held on, the firestorm of U.S. bombers would have restored my account. Afterward, I was unable to concentrate, trading in a daze. Six months later, I was gone.
Now, like a junkie come clean, I avoid the price tables in the newspaper and keep my money parked safely in mutual funds. Still, trading imbued me with a zero-sum outlook on life--that is, someone else's gain was my loss--and that outlook has been slow to fade. So when the currency news spread from the third section of the Wall Street Journal to the front page of the Chicago Sun-Times, I began to fear that the dollar's drop would cost me. This specter peaked in June when the van der Meers, the Dutch family of our au pair, en-camped in our apartment for two weeks. Their pleasure with the bargain prices in our stores, shock at the low cost of our home, and wonder that computers in America "were almost free" left me feeling pauperized, ashamed that the cash value of what I had would buy so little in their small village of tulip farmers. Just as when I was a floor trader, I felt their good fortune reflected badly on mine. I didn't like the idea of the van der Meers, or Muellers or Matsumotos for that matter, getting rich at my expense, and I began to wonder who and what were behind the drubbing my money was taking and whether my government could do anything to reverse it.
Chicago, my hometown, makes the evening business reports less often than other world financial centers, but the city is just as connected to the world markets. In 1994, for example, the dollar value of all trading on the Chicago Mercantile Exchange will exceed $200 trillion--eighty times the total sum traded on the New York Stock Exchange and six times the aggregate of all the world's gross national products. Each day, $800 billion changes hands. You wouldn't need a big piece of that to make a living--a half a millionth of a percent ($1 million a year) would do nicely.
At the Merc, as the Chicago Mercantile Exchange is known, I found Clifford Besser, a trader in the German mark futures pit. He met me in his trading jacket, the loose-fitting smock floor traders wear so that others on the floor can easily identify them. He had just realized a $200 loss and was glad. "I feel good when I take a small loss," he told me. "It proves to me that I can do what's necessary to avoid a big loss."
Walking through the Merc, which is housed in two tall towers overlooking the concrete banks of the Chicago River, one feels like the ball in a high-tech pinball machine. On the two football-field-sized trading floors one can see traders crowded into the stepped pits, shouting, running, gesturing madly. In this double-speed world, no one sits. Eight stories of narrow escalators move a constant rush of traders, brokers, and clerks, all in colored jackets, who push their way up and down like confetti in an air chute. Trucks hawking burritos, pizza, and chicken park illegally outside. Customers tear into their bags as they rush back to the trading floor.
Besser said he had a few minutes for lunch since the London markets had just closed and the rest were slow. We stopped at what passes for his office, a two-foot-high locker he rents from the exchange. It holds his work tools: cards to record his trades on, pens and pencils, and a $5 pocket calculator. It's business pared to the minimum--no customers, no employees, no inventory, no address. Just money. He pulled out a pager-sized computer terminal that reports market prices. When he leaves the floor, he carries it at all times, like a life-sup-port system. He checks it between bites of his sandwich. He also checks it when he wakes up in the middle of the night.
At lunch, Besser quizzed me about the markets, making sure I could follow his trading without pestering him during the day with a lot of basic questions. Interference from me could cost him money. For traders who can decipher the signs, the floor is as orderly as a circus is to a seasoned trapeze act. Traders learn to tune out noise and focus only on the signs they need. That takes time. In fact, it took me a year of trading just to follow the conversation in the members' lounge. Here's what I learned: Futures markets build on a basic concept, committing today to make a transaction in the future. For example, Jones runs a steel mill in Milwaukee and knows that his new German robots must be paid for in two months. Jones fears the dollar will decline over that time and cause what in effect will be a nasty dollar price hike on his robots. His solution? Lock in an exchange rate today with a futures contract. In the futures market people come together to create an auction at which a market price gets set. Futures markets also provide liquidity, letting people move in and out of the market without having to scrounge for individual buyers and sellers. Speculators who, unlike Jones, think they can make money on the currency risk also play the market, not because they fear rate changes but because they desire them.
I followed Besser into the pit for a couple of weeks in early June, the period between the two times that the large central banks intervened. On June 7, he greeted me at 7:00 A.M., before the market opened, telling me that the day before, he had traded 5 percent of the entire volume in the mark futures pit, moving around a few hundred million dollars' worth.
Digital clocks on the trading floor ticked toward 7:20 A.M., when the bell would ring to begin trading in German marks, Swiss francs, Japanese yen, British pounds, and Canadian dollars. Besser moved hurriedly toward the German mark futures pit, a stepped crater the size of a family swimming pool. Behind him two brokers stood shoulder to shoulder with phone clerks, whose job was to report the prices fed them by bank traders elsewhere, one in Chicago, another in New York. Although acting for different bosses a thousand miles apart, the clerks shouted in chorus, as if on one phone line. Currency traders everywhere know the latest market prices within a second or two. Three seconds is a long lag time. (Eastern European central banks got trounced in the currency markets before the Cold War thaw in part because their phone systems delivered wire news several seconds after it hit London.)
From the pit, Besser got a read on the mark from the electronic wall display that shows which banks are the most competitive in the major currencies. Like a video game's "top scorer" screen, better prices knock the last player off the list. For the moment, Citibank was best, selling dollars at 1.6066 marks.
A bell rang. The market was open. Besser screamed, "I'll sell 100 at 6," meaning he'd sell a hundred contracts of 125,000 marks each at the opening level, the "6" denoting the fourth digit right of the decimal. This first trade would total about $7.8 million. Besser keeps most trades only long enough to scalp a small profit or shed a smaller loss. Even if he were to hold his positions longer, he would never risk anything near the whole contract amount, only its incremental change in price.
Others in the pit and on the phones also screamed prices and, like Besser, scanned the floor for market clues. Information flows in murkily, and some traders divine it better than others. Besser eyes the pit brokers who handle business coming from off the floor, mostly from large investors, brokerage houses, and banks. Another clue is in the hand signals of the clerks communicating prices to pit brokers. They signal so fast they beat the electronic pricing boards by several seconds. Often Besser spots the direction of the market in the key instant before the hand-flashed orders hit the pit. "You have to be one of the best traders in the world to make it down here," he told me.
The prices on the walls feed traders data on all the world's markets. Above me were the latest values for metals, petroleum, IBM stock, Eurodollar bonds, soy beans, pork-belly futures, and live calves. For Besser, and all the other currency traders, the most important figure to watch is the price of U.S. Treasury bond futures. These futures, traded at the nearby Chicago Board of Trade, rise and fall according to the fluctuating yields of the U.S. government's thirty-year Treasury bonds, the benchmark for long-term interest rates (bond prices go down when rates go up, and vice versa). Interest, of course, is the price of money, and the bond-futures pit is where the price of the price of money gets priced.
In the past, the fate of the dollar has been closely tied to interest rates, since investors chased the bonds of countries that offered the best returns--best, that is, relative to inflation and economic stability. No more. The early 1994 rate hikes by the Federal Reserve failed to halt the dollar's decline, indicating that the world market had decreasing faith in the long-term value of dollar-denominated investments. The loss of bonds as a currency-market predictor meant that Besser now faced a complex riddle. "All the factors that traders rely on are working backward," he said. "You can feel it in the pit. The signs the traders have watched for years aren't pointing to the things they used to."
Now Besser was waiting for the Commerce Department figure for durable-goods orders, which was due out at 7:30. Trading was spotty and desperate before the figure was released. A few traders screamed for prices but got no takers. As 7:30 neared, all eyes lifted to the news ticker over the clock. Economists estimated a full 1 percent increase in "durables," which, if true, would reflect a strengthening economy and presage inflation--all good for trading. Trivia filled the tape before the key number. No one moved when the Bulgarian jobless rate (15.4 percent) crossed the board at 7:29. But after the Commerce Department figure flashed--a low. 1 percent--the market sat eerily quiet for a couple of minutes. It wasn't immediately clear whether the surprising figure was noise or news. Traders watched the hands of the clerks to see which big players would jump first.
By the end of the day, the trading had left most everyone frustrated. Interest-rate markets again proved their independence from the currency pits. The dollar actually advanced, but few caught the move. Besser, upset, said his day had been difficult. Early on he had made a poor trade that cost him $1,200 in a matter of minutes, and it took the whole day to get the money back.
"Most traders tie up their self-esteem and self-worth with their bottom line," Besser said, "and your success or lack of it intensifies everything you feel about yourself. You blame yourself for every bad trade." Besser also said he believes that his role in the world economy, though admittedly small, is vital. "If everyone like me who trades didn't show up, international business would grind to a halt. When the Toyota company needs a market in dollars for yen, we provide that service, the linchpin in the globalization of the economy."
By the last day, Besser believed he had the market pegged. In his new view, a decline in interest rates would help stabilize the dollar, so he planned to track the bond market's effect on the stock market. "People with dollar-de-nominated assets," he said, "are very careful with them. I'm going to watch the stock market. If interest rates decline, the demand for stocks will go up, encouraging the large [mutual] funds to stay in the U.S. market and making them realize that they need dollars." His view was counter to that of many market analysts who have noted the huge rush among American investors to foreign stocks and the currencies that buy them. Last year $175 billion moved out of U.S. investment portfolios to investments abroad. The year before, the outflow was half that. Nevertheless, Besser's theory proved predictive--for that day at least. In the weeks that followed our visit, the dollar was knocked down again.
Although traders like Besser and large banks compete among themselves for profits, they often see themselves pitted against the traders at the Federal Reserve, who are attempting to stabilize the value of the dollar. Of course, for private-sector traders, a successful Fed intervention would suck out the dollar volatility they thrive on. But the Fed rarely gets its way for long, and if it did it would likely scare the private sector off and end up playing alone. The bank has unlimited access to money and the power to control the market's underlying fundamentals through monetary policy--and it doesn't care much if its trades lose a few hundred million. Happily for market traders, the Fed is neither sufficiently committed nor ruthless enough to frighten them.
Officially, the New York Federal Reserve Bank, in Manhattan, is the fiscal agent for the U.S. Treasury, and any decision to intervene is made jointly. Treasury officials watch the markets from Washington and at set times each day confer with the New York Fed's trading desk. "We have a conference call every day at 2:30," explained John Lange, who heads the Treasury's Office of Foreign Exchange, "and we consult about the market, but of course we don't intervene every day." Lange's job is to keep Secretary Bentsen current. If the markets are unusually volatile, members of the Federal Reserve Board also get calls, and so might foreign central bankers. When the Treasury and Fed decide to strike--buy dollars, for example--public moneys are drawn from funds earmarked for currency plays.
The traders I met liked going head-to-head with the might of the federal government, and felt confident they could beat the guys who print money. Many were hoping the central banks would again come at them, again take their best shot. Certainly some of the traders' confidence derived from the fact that the private-sector market has grown so huge that even billions of dollars' worth of intervention gets sopped up quickly. As University of Chicago finance professor Robert Aliber explained, "We live in a world in which private parties have a lot of money in relation to timid authority." Official attempts to talk up the market struck traders as asinine, especially the way the Clinton Administration acted in July. Within days of one another, Secretary Bentsen told an audience in New York that the United States sought a "stronger dollar," Commerce Secretary Ron Brown said m Washington that a weak dollar would help the United States, and President Clinton told reporters at the G-7 economic summit in Italy that he saw the short-term level of the dollar as neither here nor there. Dollar selling followed all three remarks. Two traders I spoke with said they were bothered by government intervention--one because "it wasn't Bill Clinton's money they were spending," the other because the Federal Reserve traders, unlike him, can rack up huge losses buying a falling dollar and still keep their jobs. (The Fed does report its performance. In 1992 the bank showed a $314 million loss on foreign exchange but got some back in 1993 with an $80 million profit. How much has the Fed spent this year? Although the amount is easily calculated each day on the Fed's computers, 1994's results will not be available until this spring.)
The dollar's drop also brought the added pleasure of insulting the Clinton Administration. One trader, who said she will support Dan Quayle for president, told me Clinton deserved it, that his mishandling of the economy "will return Republicans to the White House for the next four terms." Most of the traders I talked to didn't merely distrust Clinton; they hated his guts. A fund manager told me, "I hate the fact that the man is going to socialize the medical establishment, that he lies about everything, and that his wife is so powerful and she is pretty damn certain to be a lesbian. A lesbian in the White House." He said his clients felt the same way. I asked what made him think Hillary Clinton was a lesbian. "Come on!" he said. |
