16/04/2004
Almost every day I get asked why a particular market has gone up or down. If the question is about a Forex move then quite often I can say because a particular bank or hedge fund sold X amount or because some stop losses were triggered. Often I will then be asked why they bought or sold and this is when things start getting interesting. Let me give you an example.
A few years ago I left one bank to join another where I ran the Forex desk. Part of my remit was to manage the risk of the traders and I would have a computer screen up at all times which showed me the positions of my traders. As full members know I often talk about the positioning of the market and market reaction to news. Yesterday morning on Harry Buzz we remarked that though the dollar and equities were weaker Gold wasn't rallying. Some traders bought Gold expecting it to play catch-up but as we pointed out on HarryBuzz the correct trade as to sell as if something doesn't go up when it should then the likely move is lower. It fell $5.
Anyway back to the Bank. Quite often I would find out that all of my traders were positioned the same way. They would all be sitting, for example, long of $300 million dollars, no doubt for the best of reasons. When this happened I would ring up a few contacts and see how other banks were positioned. On one occasion my counterpart at a large Swiss bank told me his traders were similarly long. We discussed it and agreed that though the reasons for being long of dollars were correct, with so many people long and the market struggling to rise, we needed a sell off to get rid of the weak longs before we could try higher. My counterpart and I therefore decided that our banks were too exposed to the dollar and we had an opportunity to get long at better levels. Without telling our traders why, we both sold about $250 million into a long market sending the dollar lower and squeezing many longs, including our own traders, out of their positions. When the market had calmed down we bought most of these back at a much better level.
Ok so what are you getting at Harry, apart from telling us an old war story? I hear you ask. My point is that too many people look for answers why every move happens and send themselves mad in the process. To me what is more important is what does the market expect to happen and is it happening? On the 19th February we published an article entitled: "Sell Sterling Wear Diamond." Cable was above 1.9000 and every Muppet imaginable was on CNBC saying that it was going to 2.00. It was obvious that everyone was positioned the same way and we put out a trade to our members to sell if 1.8980 broke, even though I have been bullish of sterling all year. It has since fallen 1200 points and yesterday we went long of sterling again admittedly against the euro but still at better levels.
Markets move. They are not rational because the participants are human and not rational. Believe me if you ever sat on a market making desk and met some of the traders you would understand. Many years ago one UK clearing bank would go long or short of Cable according to whether the Page 3 girls nipples were pointing up or down. Perhaps this is where the saying "going tits up" comes from.
Harry