Derivatives trader: 'The trouble is, regulators are idiots'
Joris speaks to a trader about City short-termism, high pay, the excitement of recent years and why he now wants a way out
• This monologue is part of a series in which people across the financial sector speak about their working lives
• This monologue is part of a series in which people across the financial sector speak about their working lives
'Why would a smart, aggressive, competitive 22-year-old decide to work for the Financial Services Authority?' Photograph: Sean Potter/Alamy
We are meeting in Lombard One, a restaurant in the heart of the City popular with financial types where a beer goes for £4.50. He is a confident man in his early 30s, the son of south-east Asian immigrants who now works as a derivatives trader, at director level. It's around 6.30pm and he orders a beer.
"Why trading? I read maths in university, and I love the beauty of it. Success in trading is binary. In areas like history, geography or languages, grey is the most obvious shade. Trading, at its core, is black and white. I have generated value today, or I haven't.
"Why trading? There was the glamour of it. You know, the money, the girls, rock and roll without the guitars. Another thing is, in trading you get to define yourself from an early age. You come in at 22 and you can prove yourself right away. I know guys making £1m a year at 25. This doesn't happen a lot, but it does happen and that's such a contrast with other jobs. As you know, investment banking breaks down into financial markets, where I work, and advisory, such as mergers & acquisitions. I could never be in M&A. A friend of mine works there. He was told in the first year he couldn't leave the M25 [London ring road], ever. He had to stay within a radius where he could be in the office within an hour.
"In M&A you don't really get to do anything of value in the first years. Asthese guys in your interviews are saying you work horrible hours, fidgeting with pitch books and getting the spacing right. Worst of all: if you sell advice, like M&A bankers, you almost have to puff yourself up. Why would clients pay for your advice, unless you are the smartest person on earth? It's a salesman's job – you know, a dirty job?
"If you don't come from money, you realise early on that actually, money is quite important. Let's say experienced traders like me can make anywhere between £300k and £1m a year. Meanwhile somebody fighting for our country in Afghanistan is making £22,000. It's funny how that works. When you ask me if that's fair, I also think of the guy who is making £5m, while I know I am smarter than he is. Life isn't fair.
"I come into the office around 7, in time for the 7.15 morning meeting. There'll be salespeople there, and traders. The traders will get up and give their ideas; basically they're telling the salespeople, this is what you should be pushing with clients. Salespeople have spoken to their regular clients, and they might say, there's massive client interest for this or that. You don't get much out of these morning meetings.
"At 8 the market opens, and I'll be responding to both clients and the market. It can be so hectic you can't even go to the toilets. Or so dull you end up doing your internet shopping.
"At 4.30 the business closes, you calculate your P&L (profits and losses) and file a report on why you made or lost money. Around 5.30 people begin to drift away. The more complex stuff you trade, the longer you need. If you have positions in the US, you may need to stay in as markets there are open until 9pm London time.
"Trading is a seductive world. In a bull market, with prices going up, basically everybody makes money. You ask yourself, was it me or just the market going up? It's tempting to attribute everything to your brilliance. What do I say to people claiming that a monkey with darts regularly outperforms traders? Well, for me the money hits the bank every month.
"I wish I could take you on the trading floor. There's no privacy, people are meant to overhear each other on the phone. The toilets are always in a horrible condition. I don't know why, because people on a trading floor are animals? It's just how it is.
"I love to be one of those people there, the energy, the buzz … Weird thing is, sometimes you can feel the floor exhale before you see the price action on your screen that people are responding to. The price action might be a number coming out, say higher inflation or lower unemployment … It's almost like an opera.
"There's jealousy, of course. People whispering "he had a really easy book to trade", after you had a good year. I'd say the low point is when everybody around you is making money and for some reason you are not. Everyone has bad periods, like sportspeople. You need to be strong, tell yourself "it's fine, I'm good". It's everyone's fear: to have lost "it".
"What is "it"? Call it intuition, call it the equivalent of what Messi can do with a ball. In the morning you ask traders who have "it", what do you think the market is going to do? And they go: "up". And up it goes. It's quite something.
"There seems to be this blanket anger towards bankers. It's as if you'd say: all sportspeople are bad, after some doping scandal or obnoxious misconduct by a footballer. Outsiders seem to think we're all the same. But even among traders, there is equity (shares), commodities (oil, grain etc), fixed income … Within fixed income there are interest rates people and foreign exchange. Within equity there's say, the oil and gas sector, the financials sector etc – and these are completely different beasts from those trading CDOs (complex financial instruments).
"You've got prop traders who use the bank's money to make money for the bank. And flow traders, like me, who trade on behalf of clients. Again, a huge difference.
"For flow traders the holy grail is to become a prop trader, and be away from all the politics, salespeople, clients. "Prop" is the purest form of trading. It's dying out because regulators don't want banks to take risk with their own capital.
"How it works in flow trading. At the beginning of the day I have "a view" of how the market will go. On that basis I will take "positions". Then I wait for clients to call, or be called by our salespeople, who want to buy some of that position. We pocket a commission for doing so, and we may make money from the margin between what I bought the contracts for, and what I sold them on to clients for.
"I said earlier that the beauty of trading is the black and white, but actually there is grey. There's office politics involved when it gets decided what book you trade – for example, the oil and gas sector, or the financials sector. Clearly, there can be more client flow in one book than in another.
"Sometimes a client who is very important to the bank wants to do a trade you think isn't going to be profitable. Sometimes in the interest of holding on to that client you end up doing the trade. Then office politics kicks in because you want your manager to know you sacrificed your P&L. The industry is a microcosm of society, only more intense, sharper and more fast-paced.
"Traditionally banks and firms have cared only about so-called top-line revenue, the net number of how much money you made. But management should look below the line. Say you made a lot of money from one massive trade for a client. Is that really you? Also, firms should look at revenue in relation to risk. If nobody takes notice of the potential losses you exposed the bank to, then you get traders taking huge risks, obviously. Because the easiest way to make a lot of money is to take some massive position and hope it works out. 'Efficient use of capital' is the new buzzword. Capital used to be almost infinitely available. That's over.
"It's a valid question: do we, as a society, want 25-year-old traders making £1m a year? If not, you need regulation, on a global scale. The trouble is, regulators are idiots. I am sorry to put it so bluntly but you can't expect it any other way. If an investment bank hires a graduate, two years later they will be making over £100,000. Meanwhile at the regulators you are getting £30,000. Why would a smart, aggressive, competitive 22-year-old decide to work for the Financial Services Authority?
"You now have a generation who were told as graduates by their bank: we'll make your rich. They weren't taught to think in terms of risk. Basically at banks it's quite simple: if you are generating £100m a year in profits, you can be the biggest arsehole and get away with it.
"A thing that struck me going over the comments on your blog is that people seem to think all of us saw the crisis coming. But apart from Goldman and maybe Deutsche Bank, nobody expected this. I am also angry about the crisis. When I think of the CEO of some Wall Street bank that went bust, and he still has his $400m … I mean, I owned shares in some of these banks, and they've gone to zero.
"Another thing is some people don't seem to understand risk. Risk per se is not bad. Banking is about properly pricing the risk of everything. There are very different sorts of risk, for traders. We seem to be seen as gamblers, but I know of few people who live up to that cliche. It's really quite hard to take a huge gamble. There's risk and compliance, you have risk limits you can't exceed. If you suddenly take a massive position, somebody will see it.
"Sometimes I hear outsiders say about trading 'I could do it'. When we hire people we tell them, you have to be comfortable with running an amount of risk every day of your working life. You end up thinking about it in your sleep, while you eat. It starts when you wake up and never goes away. On an emotional level, it's not that easy.
"In the old days, before the democratisation of knowledge, only a limited number of people had access to information. Our sales guys would get calls from clients who read something in the FT. These days clients go on the internet themselves. Our added value is a lot less. Investment banks have this army of analysts putting out research, salespeople peddling it to clients, traders … Do we need all this?
"An element of panic is pervading the industry. What's our business model going to be? In the past 10 years I have never seen this pace of people dropping out. Pay will only go down. A lot of people are thinking, screw it, I'll survive as long as I can, take the money, and see what happens next.
"Generally the trading floor is meritocratic and I never felt any racism. A couple of pockets, like foreign exchange, are mostly populated by old school English white boys. No idea why that is.
"The trading floor is like a playground. I was in a minority in a white school and I have learnt to see how a comment about my background is meant. Jokes can be about your weight, hair, the university you went. It's an expression of camaraderie. There you are, sitting with two levels of screens in front of you, as in the trenches. You know that the guy to your right and the guy to your left both understand exactly what it is you're doing. We all have the same desire: to get on the floor, to make money.
"Derivatives flow traders have very little scope to rip off clients – a better word would be counter parties – actually, as these are professional investors. Multiple traders at multiple firms and banks can provide the kind of derivatives I am trading.
"In my experience salespeople have very weak technical knowledge of the products. If not, they would be trading themselves. With salespeople it's crucial they have this rapport with that really important client, so they can call him in bed at 10pm. We call this the ability to make the "first call in a non-standard environment". Say the shit hits the fan and we need to offload some inventory on a client. That's when you need the salesperson.
"Salespeople always want you to meet the clients, so they can say: here's my trader. Look at him. Just like a human being, he won't steal your children's inheritance.
"The repeal of the Glass-Stiegel Act allowed investment and retail banks to merge – that was a mistake in my view. There's no easy way to go back now. The Too Big To Fail banks have become even bigger. These banks will always find a way through. What so many people fail to grasp: banks are subject to the same discipline of quarterly earnings reports as the rest of the corporate world.
"Global heads of banks know: I have to make x billion in the next 18 months or I'm out. They can't say: it's going to be difficult for the next five years. The market demands results, from banks as much as from any other company.
"Bank CEOs are like salespeople. They are selling the dream to the outside world of how they are going to make the bank more profitable. The way it works, if you are a pension fund with shares in Morgan Stanley, and you see that Goldman Sachs made 50% more profit, you will not like that. These numbers make you look like a bad investor. So you put pressure on Morgan Stanley, saying, you have 18 months to prove you can turn this around or there'll be a sell-off.
"The short-termism is endemic. In my career I have almost never seen anyone trying to build something. There are just cycles of new guys coming in. They put forward a plan promising to make money in three or four years. So the pressure is huge, and the easiest way is take more risk. It doesn't always have to be obvious, visible risks, sometimes it can be "shadow" risks that are harder for outsiders to see.
"It's like an election cycle, really. You get new management coming in, and they will go for levers that can hit the revenue number within 18 months to three years. They go over the numbers and decide: this desk doesn't work. They fire the senior guy and bring in a new guy, for x million. New guy kicks out four more guys, and brings in his own. When after three years it hasn't worked out, the bank fires those five, and it starts all over.
"This is what a lot of people miss about Goldman Sachs. You look at most guys at the top there, they are Goldman guys. There's actually less short-termism there – for me their consistent management is one of their great strengths.
"Some managers are simply psychopaths. They come up to you on a day when you've lost money, and say: "you are losing money. Why are you losing money? Do you enjoy losing money?" I mean, that is not constructive, or is it? Management, on the whole, is terrible. You rarely get somebody who understands that managing me is not about competing with me, but about getting the best out of me.
"The City, or my niche in it, is like a club. Everybody knows everybody. We went to the same universities, at one time or another dated one another's girlfriends. It's relatively incestuous.
"The past few years were the most amazing, difficult, interesting times. Absolutely exhausting. In the morning you come in and RBS is down 40%. It's Sunday evening and you get a call: Lehman is about to go bust.
"That kind of excitement has washed by now. It's back to normal, the drudgery. I wonder, is this just what happens to people 10 years into a job? You get disillusioned? Everyone around me is thinking about exits. Then again, everyone in finance seems always to be playing with this idea of "getting out", of your "escape route".
"Banking is very honest, you can measure performance and keep score. On the other hand there are so many elements contributing to your performance that you do not control (market conditions, what product you trade, how interested clients are in what you offer them). So sometimes it feels like a very expensive prison term.
"Would I want my kids to work in finance? Most people would say no. Me too. I wouldn't feel they're adding anything. I find myself more and more interested in people who have built something. My life has revolved around a number on a screen for more than 10 years now. It can't be healthy to trade a number on a screen for your entire life?"
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