A Rare Breed

PUlling aside all arguments about erficient markets, traders are around for one thing and one thing only: to make money from their views on the market. Although theory states that investors should not be capable of beating the market in the long run, people like Paul Tudor Jones l are happy to go against conventional wisdom by consistently beating the market year aner year. Either their success is merely the resuh of a statistical fluke or great traders are simply a breed apart.
The mark of a great trader is their ability to walk the walk and talk the talk. While most people actutilly find thal all paper they make great trading decisions, when real money becomes involved they soon lose the upper hand. That is because as soon YOLI enter the market, you become emotionally artached to your position and the switch from paper profils to real dollars and cents clouds your Lhinking by inserting doubt into your reasoning. Think about the past investment decisions you regret the most. They usually involve sou nd investments that you pulled the plug on too SOOI1 (I knew I should have held on to that property in Florida!) or never entered into (I knew I should have bought the Google IPO!). Either way, the error in judgment is frequently caused by the emotional rush brought on when switching from percentages to greenbacks. This mental toughness is the reason great traders are often referred to as having ice-water running through their veins or having private parts made out of steel.
Trading is one of the few professions lhal enable you to quantify exactly how good you are. since all it takes is a quick glance at your PIL. How does a consul¬tanl/engineer/manager know they are good at what they do? Usually it is through a combination of peer respect. promotions, and recognition that they use for mea¬surement. And how do they know if Ihey had a good or bad day? Traffic? Problems with suppliers? Now imagine being able 10 look at your screen at (he end of your shift and let it tell you how your day was. For traders, the measuring stick is simple: money. The lllorC you make, the better you are at your job. If you made morc than the guy to your right that must mean that you are better at your job than he is, and if you lost money today thal means you had a bad day at work. This turns trading floors into pure meritocracies, and those that make money have the power. while those that don 't are soon out the door.
Unlike investing, where the focus is on creating wealth (e.g. dividends), traders make money by catching short-term moves for quick gains. Trading, like poker, can be described as a zero-sum game. If you are winning then someone else must be losing. This battlefield aspect to the markets is something that the novice trader disregards at his/her own peril, since humans sit behind those trading screens and you can bet that they will do everything in their power to take your money, even if that means bending the rules in their favor.
The fact that 1110S( traders are also avid gamblers should come as no surprise, and thus you may find at anyone time that bets on sporting events or the eating capacity of the latest intern overshadow A trader's edge is their ability to deal with uncertainty at minimum risk, which is exactly how the Rothschild family made their fortune in the 181h century. The idea was simple yet brilliant: in a time of slow communications, courier pigeons could be lIsed to transm it gold prices across the English Channel, giving you a day 's head start on the market and opening the door 10 arbitrage opportunities. When the price was lower in Paris, they would purchase it there and sell it in London. keeping the difference. Their advantage was information, which was thoughtfully transformed into profits.
Deal ing with ullcenainty can also mean being pro-active ;:lnd forcing your oppo¬nent's hand. When asked about his playing. Ed Lasker. one of the greatest chess players of all time. noted that in order to succeed he would ask himself, "What is my opponent's present state of mind. and how can I worry him the most?" Simi¬larly, the very best traders have the innate ability 10 look at the market objectively while at the same time perceiving it from the eyes of their opponents. What move do they fear the most? What will they do if prices go down? Lasker explained that he "sometimes achieved victory by boring my opponents to death, or by luring them into allacks when allacks weren't III their nature". Successful lraders apply these same concepts on a day-to-day basis. and use this edge to actively shape their future by playing to their opponent's weaknesses.
Market panicipants (and pawn shops) know that it is much easier to rip-off someone in trouble than to make money through your own trading skills, so over the years they have evolved into efficient killing machines that would make Darwin proud. If the market catches a wisp of a hedge fund III trouble. you can be sure that the sharks will move in and actively push the market against them until they are dead in the water. This active "hunting" role is something that most model developers do not take into account, and to a large degree it can be said that their "sigma-nine,2 events are often self-perpetuated. If Amaranth had not gone balls-ollt long on natural gas, for example. the market would probably not have dropped like it did.
Foreign exchange speculators are often regarded by developing nations as "eco¬nomic war criminals" who prey on (he weak and defenseless, yel ask FX traders and they will tell you that they are simply the instruments of global macroeco¬nomjc forces. As George Soros famously proclaimed, "As a market participant, I don'l need to be concerned with the consequences of my IflnancialJ actions:' In other words, he did not create the imbalance, so why should he be blamed when he corrects it?
Forex traders are a unique brand of speculator with an almost monastic devotion to their profession, working obscene hours and concerning themselves with global macro events. What effect will the Tokyo eanhquake have on the Swiss franc? How will the US dollar react to inflationary signs coming oul of Germany? Try explaining how you make a living to a stranger (or your spouse) and they will look at you as if you are crazy. The ability to select. process. and take advantage of seemingly unrelated and unending data points in the blink of an eye is what sets currency traders apan. Through the eyes of a forex trader every asset trade is essentially a bet on exchange rates. and those that learn 10 connect the dots faster than anyone else end up on top.
The world's economies are now one giant interconnected machine, and the grease that keeps the gears running smoothly is foreign exchange. Legendary FX traders have made their careers by figuring out. before anyone else. what repercussions event X will have on country Y's currency. This clairvoyance often instills a level of self-confidence that would humble professional athletes. and when combined with the tremendous amounts of leverage available 10 traders it often leads to some truly mind-boggling bets.
In 1988. for example, when Bankers Trust hotshot Andrew Krieger was asked about his short Kiwi position he famously replied, "How large is the monetary supply of New Zealand?" Believe it or not. through the use of derivatives Krieger managed at one point to actually short more than New Zealand's entire monetary supply! Although this gutsy bel ended up netting him a cool $300 million. when self-confidence turns into arrogance the effects can be devastating.
Yasul Hamanaka. The Sumitomo Corp. traders positions were so huge. that he eamed the nickname "Mr. 5%~ for allegedly controlling five percent of the world's copper market. Unfortunately for Sumitomo, his 10 year career was mostly filled with bogus contracts and fictitious entries meant to hide his mounting losses. By the lime he was discovered, he had racked up $2.6 billion in losses which he paid for by doing eight years in jail.
Nick Leeson. Star trader for Barings Bank. his derivative losses hidden in his secret 88888 account ended up costing the "Queen's Bank~ $1.2 billion and managed to bring down one of the world's most venerable banking institutions overnight.
John Rusnak. Allied Irish Bank's chief rogue trader. His out-of-control fx trades ended up costing the bank a cool $691 million.
Peter Young. Morgan Grenfell's star trader is not best remembered for his unauthorized trades (a mere $350m). but the fact that he showed up to court wearing women's clothes in an attempt to plead insanity. Seems like Young got the last laugh since the court declared him unfit.