I’ll never forget Peter’s first words to me.
He said, ‘Jason, you’ve made it to this side of the revolving door. The hard part for many people is staying here.’
This was Peter’s way of telling me that results were everything.
Peter was the chief of trading at Bankers Trust Australia.
It was the summer of 1991. Australia was thumping England in the Ashes series and Bart had just seen home his eighth Melbourne Cup winner, Kingston Rule.
I remember this time vividly. Not so much for its sporting highlights, but rather for the life changing door through which I was about to pass. I was about to join the world of high finance.
It was two days before my 21st birthday, and I was nervously walking into the foyer of Australia Square tower in Sydney’s CBD. Awaiting me on level 40 was my dream job. I was about to start work in the trading room of Australia’s then leading investment bank — Bankers Trust.
I could hear the buzz of the trading room as the lift doors opened. Walking towards the ever-increasing noise was exciting…and terrifying. My heart was beating as if I were running. I could feel beads of sweat running down my side.
Stepping into the dealing room was like landing on a different planet. The sprawling open plan setting was full of bustle and noise. Before me was a sea of traders. Some were standing with a phone to either ear, while others were gesturing towards flashing screens.
This was an intimidating place to say the least. It was full of extremely smart and creative people at the top of their game. Word was that the average salary in the room was greater than any anywhere else in the country.
Many within the bank went on to become multi-millionaires (if they were not already). One even made it to the BRW top 10 in 2014. Bankers Trust was the original millionaires’ factory.
I remember reading Tom Wolfe’s bestseller Bonfire of the Vanities while at university. He tells the story of a high-flying Wall Street bond trader. The book is famous for popularising the phrase Masters of the Universe. To think, I was now standing amongst the Masters.
After a few days, I got the call to go and meet the head of the dealing room. Peter had a big glass office in the middle of the trading floor — a bit like a goldfish bowl. There was nowhere to hide if things went pear-shaped. You were on display for all to see! This is where he told me I had my big break…now I just had to work harder than ever to stay there.
The financial rewards for success were boundless. My bonuses were doubling almost every year. There are not too many jobs where your pay packet increases so quickly.
The dealing room had a number of departments: foreign exchange, options, money market, bonds, and futures. I was joining the bond desk as a dealer’s assistant.
It was not too long before I got to know the lay of the land. The most raucous characters in the room were the spot foreign exchange dealers and the futures floor traders. In those days, it was not unheard of for a dealer at the wrong end of a trade to smash a computer screen with a phone!
At the far end of the room was a mysterious group by the name of ‘Positioning’. They were not loud like the foreign exchange dealers, they did not wave their arms around like the futures floor traders, and they were not busily doing deals over the phones like the bond and money market dealers.
The Positioning desk was different. These traders would sit quietly at their screens and use ‘quantitative’ methods to analyse the markets. That is, they created complex mathematical formulas called algorithms. They would use these algorithms to trade everything from currencies to commodities.
Algorithmic trading made it possible for this group to identify recurring patterns in the markets. Their synchronised algorithms, or trading system, would analyse huge volumes of data in search of opportunities.
The algorithmic system was highly profitable and made this group one of the shiniest jewels in Bankers Trust’s already dazzling crown. These quiet and unassuming types were the rocket scientists of the financial world.
Positioning were not seat of the pants traders. They had no time for gut feel, and they did not crave an adrenalin rush from trading. Everything they did had a statistical underpinning.
I remember the head of the desk saying he could statistically prove that markets move in trends.
This was an amazing revelation to me.
The professors at university had told me that prices are random and that no one could beat the market. Yet now I was hearing one of the brightest stars in a room of superstars say trends offer an exploitable advantage.
And he wasn’t just saying it…I saw it happen first hand. It was the early 1990s, and Australian interest rates were falling. The dealing room had a huge bet that rates would fall further at the next RBA meeting.
Sure enough, rates fell — big time. The RBA cut by more than the market was expecting. The room’s massive position was up $10 million dollars that morning alone. This was a huge amount of money back then.
Senior management were getting anxious. Their go-to man was the head of Positioning. Richard had the job of deciding when to cut the trade. He knew how this would work. He had knowledge of the statistical advantage of following trends.
Richard ran the $10 million gain to a massive $15 million win.
Let me put this into perspective for you. Banking giant Westpac made a profit of $476 million in 1991 — or a relatively meagre $1.3 million per day.
The techniques the Positioning team used were a gold pass to making a lot of money.
This success quickly spread beyond the walls of Bankers Trust. Before long, a Bermudan hedge fund made Richard an offer he couldn’t refuse. Even a leading investment bank can lose its grip on talent of this nature!
Algorithmic trading was captivating. I was hooked. This is what I ultimately saw myself doing. But first I had much to learn about the psychology, patterns and phases of markets. Only then could I really start to think about systemising my ideas.
Traders with just a small advantage can make very high returns over time. I now had an advantage, an edge. Algorithms and trends were the keystones on which I would build a career. Financial independence was within my grasp.
For The Daily Reckoning Australia