Free The New Market Wizards: Conversations with America's Top Traders by Jack D. Schwager Page B

sell $2 billion in the foreign exchange market, I’m accepting the credit risk and providing the liquidity and facility to make that trade. In exchange, you’re providing me with the information that you’re about to sell $2 billion. That is not a totally unreasonable rationalization.
     
    How do you move a large order like $2 billion? How do you even get a bid/ask quote for that amount?
     
    I’ll tell you what happens. Let’s say an order comes in for $500 million or more. The dealer stands up and shouts, “I need calls!” Immediately, among the dealers, junior dealers, clerks, and even the telex operators, you have forty people making calls. Everyone has their own call lists so they don’t call the same banks. They probably make an average of about three rounds of calls; so there are 120 calls in all. All of this is done in the space of a few minutes. The dealer acts as a coordinator—the bank staff shouts out bids to him and he calls back, “Yours! Yours! Yours!” all the time, keeping track of the total amount sold. A large bank can move an amazing amount of money in a few minutes.
     
    When you get right down to it, virtually all the trading profits seem to come from profit margins on the bid/ask spread and coattailing of large orders. That makes a lot more sense to me, because I couldn’t figure out how the banks could hire all those kids right out of school who could make money as traders. I don’t think trading is that easily learned.
     
    You know my pet peeve? Is that trading? Even at Salomon Brothers, where there’s a perception that everyone is a trader, it came down to only about a half-dozen people who took real risk. The rest were essentially just making markets. That nuance is lost on most people.
     
    Getting back to the credit risk associated with the interbank market that you mentioned earlier, when you do a trade, are you completely dependent on the creditworthiness of the other party? If they go down, are you out the money?
     
    You got it.
     
    Has that ever happened to you?
     
    No.
     
    How often does it happen?
     
    If a trade involves anyone who is even in question, you can ask them to put up margin.
     
    Isn’t it possible for a bank with a good credit rating to suddenly go under?
     
    Suddenly? No. What is the worst case you can think of? Drexel? Salomon stopped doing currency transactions with Drexel a year and a half before they went under.
     
    Are you saying that there’s not much of a credit risk involved?
     
    There is some risk, but does a Conti fail overnight? We stopped trading with Conti five months before the Fed bailed them out.
     
    But someone was trading with Conti in those last few months. Were they just less well informed?
     
    Not necessarily. They were just willing to take the risk. You can be sure that in those final months, Conti was not dealing at the market. At a certain interest rate level, you would lend any bank money. The reason why surprises don’t happen is because it’s in everyone’s interest to know when there is a problem. Therefore, credit officers are very quick to share information whenever they think a problem exists.
     
    Do you ever have dreams about trades?
     
    On one particular occasion, I had a very specific dream the night before a balance-of-trade number was to be released. I dreamt that the trade figure would be a specific number; the revision would be a specific number; the dollar would move up to a certain level, and I would buy dollars; the dollar would move up to a second level, and I would buy more dollars; the dollar would move up to a third level, and I would buy yet again; the dollar would move up to a fourth level, and I would want to sell but would buy again.
    The next day, the trade number came out, and it was exactly the same number as in my dream. The revision was also exactly the same number. Even the price sequence was exactly the same as in my dream. The only difference was that [he pauses] I didn’t trade at