I am very grateful for the responses to Thursday’s column,
ranging from congratulations, through jokes, to guesses as to exactly what
event triggered the Cable drop I was talking of.
A clear favourite was the infamous “Carrier Down” story. For
those in the dark this (possibly apocryphal story) involves a news screen
during the Falklands War, which suddenly started flashing the message “Carrier
Thinking a British aircraft carrier had been sunk a trading
desk started selling sterling like crazy, only to have a man walk in about an
hour later, say he was from the company that provided the news service and
inform them that “Carrier Down” was the message displayed when the news service
As much as I would like to think that was the occasion, my
instincts tell me my morning happened in 1984-85 and were not actually
triggered by an event as such.
Either way, that leads me nicely to the first of my top five
events which is closely related…
5: The first of the
The media does love to affix the word “black” to different
days of the week and the financial world is no different, but long before the
Black Friday of the Wall Street Crash of 1987 (but long after the “Black” day in
1929!) FX had its own “Black Friday”.
Unfortunately I cannot pin down the exact day, but it was
September 1984 (if pushed I’d say around the 21st) at lunch time in London.
Dollar-mark (look it up kids or ask the old guy at the end
of the desk) was trading around 2.98 having spent the last month rising some
10% amidst steady but relatively light selling by Germany’s central bank,
Bundesbank (or Buba as it was known in markets).
While the market was busy, there seemed nothing
extraordinary going on. New York came in and the dollar, which was in a long-term
uptrend, started to rise quickly. 3.00 came and went, as did 3.05, 3.10 and
I think there may have been a US economic release to trigger
the move, but either way it was around this time that Buba decided to put the
big boots on and come into the market swinging. USDDEM collapsed very quickly
back to 3.00 from around the high of 3.17 – and the Buba retired from the
The market had other ideas and very soon USDDEM was back up
at 3.13 and so, again, Buba sold aggressively and knocked it back down to 3.00.
As I recall the market had another go, but this time Buba was waiting and it
didn’t get above 3.08 before settling just under 3.00 for the rest of the
afternoon while the market licked its wounds and the central bank waited
nervously for the next assault.
For the teenagers reading this, we are talking the
equivalent of EURUSD moving from 0.6500 to 0.6150 and back, several times. I
recall one person on our desk saying the market moved a cumulative 70 big
Two things about this event strike me.
Firstly, this all took place over about 30 minutes and after
that you wouldn’t have known it had happened as the market traded sideways.
The second one is even more bizarre. I was trading Cable and
sitting next to my dollar-mark trader – and Cable barely moved! I was treated
to this absolute meltdown next to me while my market watched on impassively.
I suspect the reason was that back then the crosses were
rarely traded, indeed at that time the inter-dealer brokers didn’t even have
dedicated sterling-mark desks (they soon did!). Either way, it was one of those
events – and I suspect some involved in the Cable flash crash last year felt
the same – where you were left wondering, “Did that really happen?”
4: The central banks
get their act together
As the previous reminiscence will highlight, back in the
1980s the central banks were occasionally treated with less than total respect
by FX traders. It wasn’t deliberate, it was more a question of fundamentals –
as is the case today, a central could wish
their currency higher or lower, but if the economics were pointing the other
way the market simply followed the numbers.
A good example of the relationship between FX trader and
central bank can be found when a dollar mark trader (it was always the
“industrial dollar” boys!) I was working with was buying dollars aggressively
only to have another trader shout across the desk “Buba’s selling!”
Now the Bundesbank wasn’t the most subtle of central banks
in the 1980s – that came later – so when they were in, they were in large! The
response of the trader? “Ask him how many he wants to sell and take ‘em all!”
On September 22 1985 that world changed to all intents and
purposes (actually it didn’t, CBs were still treated with a heathly disdain on
a regular basis) when the details of the Plaza Accord were released.
Clause 18 of the Accord stated, “The Ministers and Governors
agreed that exchange rates should play a role in adjusting external imbalances.
In order to do this, exchange rates should better reflect fundamental economic
conditions than has been the case. They believe that agreed policy actions must
be implemented and reinforced to improve the fundamentals further, and that in
view of the present and prospective changes in fundamentals, some further
orderly appreciation of the non-dollar currencies against the dollar is
desirable. They stand ready to cooperate more closely to encourage this when to
do so would be helpful.”
The background to what was then the G5 meeting (like
everything else the ‘G’ has been super-sized since) was the rising dollar
mentioned in the previous memory. USDDEM had hit 3.47 (EURUSD 0.5635 kids) at
one stage in early 1985 but had since been moving steadily down.
On a personal note, Cable had been trading lower and this
provided my first promise of a “parity party” as it went through 1.10 and then
1.05. Sadly my hopes of such a party were dashed when, one morning, I was given
at 1.04, I gave my broker at 1.0390 because I didn’t like the position, I heard
1.0380 trade and then…. “04-06 Cable”.
Me to my broker: “What’s the big figure Dave?”
Broker to me: They are the big figures you [insert
descriptive noun here]”
When Cable was trading back above 1.07 a few seconds later
my forward desk then thought they would inform me that below 1.04, the six
month outright Cable rate (a favoured period for corporates hedging) had gone
The result? Every Corporate with sterling buying
requirements did so – my chance of a parity party were dashed and, more
pertinently and to my eternal regret, I was never able to say I sold at the
I digress, however, for on September 20 1985 USDDEM closed
at 2.85 (USDJPY at 240 – yes honestly kids!) and on Monday in Asia they were
very quickly trading at 2.70 and 230 respectively.
This was the first time coordinated intervention had really
worked and work it did, because it was only 17 months later in Paris that the
same G5 signed the Louvre Accord. And what did the Louvre Accord do? Yep –
that’s right, it stopped the dollar’s decline.
Currency manipulation anyone???
3: The UK is making a
habit of this…
Last year’s UK referendum decision to leave the European
Union was a bit of a shocker to just above everybody (including the ‘Exit’
camp) and the reaction in markets was right up there with the biggest I have
seen, but it wasn’t the first time the UK had decided to exit a European dream.
“Black Wednesday” (some still refer to it as “White
Wednesday”) was September 16, 1992 (have you noticed how so much happens in
September?) and came amidst a prolonged period of upheaval in the European Rate
Mechanism (ERM), the precursor to the euro. The Danes (who I think were to
blame for the whole thing – I know they look friendly but…) had voted to reject
the European dream, and German interest rates were on the rise and causing pain
The fluctuation bands within the ERM had been widened (and
after this they were widened further, to 15% in some cases) to allow Deutsche
mark strength but still the pressure was intense on several currencies, one of
which was sterling – the floor for which was 2.7780 in sterling-mark.
The pound had been flirting with its floor for a few weeks
but September 16 saw the pressure really ramp up and soon the inter-dealer
broker market was 2.7780-79.
The intuitive amongst you will notice that quote is the
wrong way round. This is because the Bank of England was on the bid for
minimums of 30 million (if I recall correctly – I think it was raised to 40
million later in the day) so if you wanted to do less, you had to offer through
A lot has been said over the years about how one man, George
Soros, broke the Bank of England but that is nonsense – this day really was the
Old Lady versus the rest of the world (including the Bundesbank!)
As an example, I used to receive calls from regional Italian
banks every day and a typical conversation on the Reuters Direct Dealer when as
Regional Italian Bank: “Stg-mark plse”
RIB: “Mom my risk for fix plse”
This was repeated several times and normally ended up with
two or three of the banks selling or buying a small amount of sterling
(normally around 500,000).
On this day the conversation was different and with 10 RIBs
My colleague: “stg-mark for the Italians please”
Me: “I’m too busy for this, make them all 65-70 and tell
them to go away” (no it wasn’t as polite as that).
My colleague: “But the Old Lady is at 80”
Me: “Just make the 65-70 and tell them to go away” (or
something like that).
My colleague: “Errr Colin”
Colleague: “They’ve all given you at 65!”
Me: “Ok, stick it in the book, when I get to 30 million I’ll
give the Old Lady”
Colleague (tapping on calculator): “Errr Colin – they’ve
given you a collective 310 million!”
Me: “I say” (or something similar).
It was at that moment that I at least realised the UK had no
chance of staying in the ERM and I am sure others had a similar experience. I
was on the train home when the official announcement came and my pager –
dealers of a certain vintage will remember the pager, it made it easier to spot
other dealers because we were always checking a small object at our hip whilst
having a conversation – showed me sterling drop from 2.76 and change (it had
gone through the floor at 4pm London when the ERM “closed”) to 2.61 and change.
Funny how both times sterling exited Europe the move was
around 15 big figures – anyone would think this stuff is correlated!
There are so many stories from this day one could write a
small book, so I won’t go into them all, but suffice to say it was one of the
most memorable – if only because it was the easiest money most of us ever made.
2: “You must have
Because this is self-indulgent nonsense, this event is
actually the biggest thing to hit foreign exchange markets in my 40 years, but
it has to take second place to my ego!
We have all seen exchange rate pegs collapse before, the
previous example is one such occasion and there have been dozens – but none
have changed the landscape like the day the Swiss National Bank removed the
The teenagers can celebrate that I have finally picked an
event during their lifetime, but I honestly believe this was the biggest day in
my 40 years.
Forget the damage to the SNB’s reputation and the number of
retail punters who lost their house, this also scarred the institutional
Prime brokers have been forced to pull their heads in, risk
appetite is a lot lower than it used to be and, once again, VaR as a measure of
risk was shown to be useless (a friend of mine in the risk business refers to
VaR as the Sonar system that tells you you’ve hit the Island).
The machines went out of control (because an algo cannot
guess where the market is) and we had a trade at 0.0125, we had a random
setting of the low at 0.85, even though most rules of the market told us it
should have been around 0.70 and, most damaging of all, we had counterparties
trying to unilaterally re-paper trades.
Following the benchmark scandal there was an absolute break
down in trust amidst revelations of both LPs and customers trying to hold the
other to trades at 1.18 and 0.75 and, importantly, there was a breakdown in the
trust between markets and SNB – that one has yet to play out fully.
I do find it a little strange that the money that was made
that day was largely made by manual traders, but that hasn’t stopped firms
reducing their headcount in this area, but that is the march of progress.
Either way, this was the day that we all realised the modern
foreign exchange market was very vulnerable – and it remains so.
On a personal note, I have to clear one thing up. Yes, I had
written that very morning about the SNB removing the floor (in a great example
of my skills I took a deep breath and predicted the market could fall as much as 400 points – oops!) but no, I
did not think they would do it about three hours later!
1: The shortest
My apologies to one and all but instead of including
something like Lehmans, the collapse of the carry trade in 1998, the Asian
crisis, I had to be self-indulgent because this is where it all started.
Without the following, none of the above would have happened.
To be serious for a moment, I do love the foreign exchange
industry, it has given me a great life to date and hopefully will for many more
years to come. I am passionate about its success and still have tremendous
enthusiasm for it – thanks mainly to the people that work in it. Last week I
was helping run an ACI Australia Dealing Simulation Course and as is the case
with every other group around the world that we teach, the week gave me great
hope for the future.
With this in mind then, here is where it all started…with
the shortest interview of my life.
Scene One – door opens stages left, Australian man with
biggest moustache I had ever seen walks in holding what turned out to be my
Moustache (throwing my letter on the table): “Says here you
Me (wearing a brown three piece pinstripe suit with ‘pudding
basin’ haircut – calm yourselves ladies): “Err yes”.
Moustache: “You any good?”
Me: “Essex [a county playing professional cricket for the
heretics out there] have had a look at me, it won’t go anywhere…but yeah.”
Moustache: “Start Monday.”
Me (naively): “I was hoping for a few weeks off after my
Moustache: “Salary’s £2,400 a year [every other bank was
paying £1,076!], start Monday or don’t start at all.”
Me: “Where do I sign?”
We signed forms, he told me the formal letter would be sent
that day and stood up. “Good, see you Monday. Aussie banks’ cup final is on
Wednesday. If you’re [fooling] with me, you’re out of work on Thursday.”
He then left without a word of good bye and the rest my
friends, is history!
Here’s to many more years and normal service will resume on