(set: $position to "flat")(set: $compliancestatus to "null")(set: $GCstatus to "null")(set: $pandl to 0)(set: $varisk to 0)(set: $funding to 0)(set: $riskmanager to "Daniel Vitam")(set: $riskreports to "You")
In this game, you take the role of Bill Brewer, an investment banker recently appointed head of the securities trading business of an unnamed investment bank, in the Republic (formerly Kingdom) of Ruritania..
You survey the ranks of your team, packed into the "boardroom" of your small set of offices in Zenda, capital of Ruritania.
They are a pretty miserable looking lot, hungover and nervous-looking. These are the raw materials that you are meant to be turning into a market-leading franchise in the hottest new emerging market in town.
You start your speech with a few platitudes, saving the really good news - that no major redundancies are going to be made - for last. Finally you pass on to them, more or less verbatim, the instructions you were given from head office (it hardly matters which big bank you are working for, most of them are the same these days).
"We need to get into the top three traders in this market, and that means we are prepared to commit more capital. However, this must not be done at the expense of profitability, and we need to manage our own risks".
You have always wondered whether or not this actually makes sense, but those were the orders. And you kind of need this one to work out; you are not really all that newly-promoted a Managing Director any more, and your career, despite the health- and marriage-destroying hours you put in to it, didn't seem to be going anywhere before you got this posting.
"So work hard, work smart and hustle, hustle, hustle! We want good business and we want lots of it! Now get to work!". Your troops seem to have been rallied as much as could be expected, and you now need to make a few decisions.
The "Zendex" stock market index stands at an all time high. Your P&L year to date is zero; the slate was, thankfully, wiped clean when they sacked the previous head of the Ruritanian business. You have instructions from head office to keep the risk level constant, but you are experienced enough to know that these limits are made to be flexed. Since your predecessor was kind enough to leave you with no positions, you have no funding needs either (although this is having something of a damaging effect on your business volumes).
Your first meeting is with Jan Stewer, your head of trading. He points out that there is no way that you can do business in this market without taking risks; clients want their orders executed immediately, and it can take you days to find the stock.
This means that when they buy shares, it leaves you with a structural short position in your inventory - you have struck a bargain at a given price, so in a rising market, the fact that time passes means that you generally pay a higher price for the stock you deliver than the one you agreed.
The commissions that the clients pay on each trade are substantial, and they are meant to offset this risk, but they don't always. He needs a policy decision from you on how to manage this risk:
(link:"'Buy a load of Zendex index futures. That way, we have a structural long position which will, hopefully, offset our structural short'")[(set: $position to "long")(goto:"Gurnimeeting")]
(link:"'Don't do anything in particular. We have a structural short position, but that's part of doing business. We're not here to take a view on whether the Zendex is going to keep going up'")[(set: $position to "short")(goto:"Gurnimeeting")]
(link:"'The index futures market is much more liquid than the individual stocks. Get the risk management quants involved, and, on a daily basis, buy exactly as many index contracts as we need to get ourselves to a broadly neutral position'")[(set: $position to "hedge")(goto:"Gurnimeeting")]Your next appointment is a more irritating one, with Pedr Gurni of the Central Bank of Ruritania. He is hard to read; he speaks English with a trace of an American accent, but dresses in a cheap suit with a red tie. He is here to lay down the law to you on reporting standards; it appears that your predecessor left things in a real mess and failed to file regulatory returns for the last six months.
Your risk manager resigned two weeks ago and so far you have been unable to hire a new one, so Gurni is looking to you personally to clear the backlog of reports, and submit them on an ongoing basis in future. At least you can do them in an Excel spreadsheet, but the formatting is difficult to understand, and the way that the CBR wants its data makes it difficult to simply cut and paste the numbers from your own bank's daily reporting systems. This looks like it is going to be a real pain in the ass.
Apart from this bad news, Gurni seems like a good contact to have made. He gossips happily about local politics, the forthcoming Chinese trade deal and so on. He seems to have good words to say about all of your rivals. He leaves behind a business card, but scribbles his personal email address on it too.
You have to decide what to do about this reporting issue:
[[Hand over to GC <- Hand it over to the experts in head office's Group Compliance Department]]
[[Offer Gurni job <- Make Pedr Gurni a job offer to become your new local risk management guy]]
[[Tackle backlog yourself <- Start to tackle it yourself]]
[[Let it ride <- Let the problem ride for a while and add it to the backlog when a new risk manager is hired]](set: $compliancestatus="pilingup")
(set: $GCstatus="consulted")
This one bounces straight back by return of email. "It is policy for local reporting to be handled at local office level. Group Compliance has no legal status to make Ruritanian reports, and our resources are stretched to the limit anyway. Suggest you make local recruitment an absolute priority. Thank you for bringing this reporting deficit to our attention; we will continue to monitor progress toward compliance. Best regards, Fay Widdicombe, Group Compliance".
Thanks for nothing guys. You have an uneasy feeling that you have made a minor but potentially important new enemy.
[[second trading week <- Go back to the trading floor]](set: $riskmanager to "Pedr Gurni")
You send Pedr an invitation to meet up for coffee at the weekend and indicate you have a proposition for him. He says yes to the coffee, but this isn't a solution to your immediate problem. In the meantime, you need to either [[Tackle backlog yourself <- start on the workload yourself]] or [[Let it ride <- let it ride]]Slugging through Ruritanian regulatory reports is a whole heap of no fun at all and keeps you working late nights. Your ambitions to do some exercise fall away, and you're conscious that you are not making friends or contacts, still less meeting clients. But you feel like you are getting it under control, and gathering information about how the business works.
(set: $compliancestatus="DIY")
At the end of the week, you need to go [[second trading week <-back to the trading floor]] to see what has happened(set: $compliancestatus = "pilingup")
You get out and meet clients, trying to spread the word that your bank is redoubling its efforts in the Ruritanian market. The rich local food is not exactly good for your waistline, but the goodwill you are building up seems to be reflected in order flow. The reporting backlog is piling up a bit, but so far nobody seems to care.
At the end of the week, you go [[second trading week <-back to the trading floor]] to take stock of how things are going.(if: $position is "long" and $compliancestatus is "pilingup")[(display: "tw2longpilingup")]
(if: $position is "short" and $compliancestatus is "pilingup")[(display: "tw2shortpilingup")]
(if: $position is "hedge" and $compliancestatus is "pilingup")[(display: "twhedgepilingup")]
(if: $position is "long" and $compliancestatus is "DIY")[(display: "tw2longDIY")]
(if: $position is "short" and $compliancestatus is "DIY")[(display: "tw2shortDIY")]
(if: $position is "hedge" and $compliancestatus is "DIY")[(display: "tw2hedgeDIY")](set: $pandl=1000000)
The compliance burden is far more of a pain in the ass than you had ever expected. You spend whole days in the office trying to get the reports right, with the consequence that you've hardly met a client yet. Head office are sending you annoying messages about your declining market share, although obviously not offering any help.
At least the news from the trading floor is cheerful. The Zendex has spiked up 20% in the last two weeks. Jan Stewer and his team have been working the phones and hustling like mad, and your structural hedge seems to have paid off; in fact, it's even made a bit more money than you'd anticipated. So far, so good - you are maxed out on risk limits, but at least you're making money.
You have declared "Plum Brandy O'Clock" on the trading floor, to celebrate the biggest daily profit the office has ever made. Of course, no party in the investment banking industry is complete without a self-invited guest who nobody wants, and yours is Peter Davey, the Regional Head of Business Development for Ruritania, Illyria and Erewhon.
He's a guy about the same age as you, with a job description annoyingly similar to yours, and apparently Tom Pearce at head office (the big boss guy) wants him to be based out of Zenda for a few months. He's perfectly personally charming, but you are old and wise enough not to ignore that tingling sensation in the stab-zone of your back.
Over drinks, he asks you that age-old loaded question, "How can I help you grow your business?"
What do you say?
(link: "Help me deal with the risk and reporting problem")[(set: $compliancereports to "Peter Davey")(goto: "Pass reporting to PD")]
(link:"Go out and drum up some more business!") [(goto: "Keep risk reporting")](set: $pandl = -2000000)
The streets of Zenda are running with euphoria. The Zendex has spiked up 20% in the last two weeks. Jan Stewer and his team have been working the phones and hustling like mad, but this is not great - the market is rising and you are structurally short. Every deal you do seems to cost money.
Head office congratulates you anyway; you have managed to keep losses to below the levels they had budgeted for, and market share is up. It's even suggested to you that the P&L targets could be adjusted downward or abandoned altogether if market share seems to be growing - "we're in this for the long term" is the message you give to your traders.
In fact, you decide that some sort of grand gesture is needed, to reinforce the view that market share matters more than the daily P&L in the short term. So you institute the new Friday evening tradition of "Plum Brandy O'Clock" on the dealing floor. Of course, no party in the investment banking industry is complete without a self-invited guest who nobody wants, and yours is Peter Davey, the Regional Head of Business Development for Ruritania, Illyria and Erewhon.
He's a guy about the same age as you, with a job description annoyingly similar to yours, and apparently Tom Pearce at head office (the big boss guy) wants him to be based out of Zenda for a few months. He's personally charming, but you are old and wise enough not to ignore that tingling sensation in the stab-zone of your back.
Over drinks, he asks you that age-old loaded question, "How can I help you grow your business?"
What do you say?
(link:"Help me deal with the risk and reporting problem")[(set: $compliancereports to "Peter Davey")(goto:"Pass reporting to PD")]
(link:"Go out and drum up some more business!")[(goto: "Keep risk reporting")](set: $riskreports to "PD")
(if: $pandl>=0)["His eyes visibly narrow at you and it is clear that you have fired the first shots in a turf battle. "I'm not your fucking back office buddy, Bill", he snaps back.
You hold your cool and decide to take the moral high road. "Pete, dude, I wouldn't ask if we weren't totally in the weeds here", you reply, pouring him another glass. "But you've got regional COO responsibilities, and I just need someone to get the regulator off my ass, keep things straight. I can't have the risk manager reporting to me, can I? Hire who you like".
He is slightly mollified at the prospect of a small increment to his direct reports.]
(else:)[He tries to maintain the friendly atmosphere, but it's clearly gone. "I'm the Regional Head of Business Development, not the Regional Head of Back-Office Shit For Under-Budget Offices", he reminds you.
You hold your cool and decide to take the moral high road. "Pete, dude, I wouldn't ask if we weren't totally in the weeds here", you reply, pouring him another glass. "But you've got regional COO responsibilities, and I just need someone to sign off on this guy from the central bank, keep things straight. I can't have the risk manager reporting to me, can I? Hire who you like".
He is slightly mollified at the prospect of a small increment to his direct reports.]
(display: "Next morning")(set: $riskreports to "You")(if: $pandl<=0)["Attaboy! We can fucken turn this one around together!", whoops Peter Davey, slapping you on the back. You wince a little inwardly at the display of corporate swearing, but the rest of your staff are hardly behaving much better.
The two of you toast the success of the Ruritanian office with copious further glasses of Plum Brandy. You end up concluding to yourself, as you pour yourself out of a taxi and into your apartment much later that night, that Davey, although annoying, is basically probably an all right guy.]
(else:)["Attaboy! Let's fucken do this!", whoops Peter Davey, slapping you on the back. You wince a little inwardly at the display of corporate swearing, but the rest of your staff are hardly behaving much better.
The two of you toast the success of the Ruritanian office with copious further glasses of Plum Brandy. You end up concluding to yourself, as you pour yourself out of a taxi and into your apartment much later that night, that Davey, although annoying, is basically probably an all right guy.]
(display: "Next morning")(set: $pandl = 2000000)
Two weeks into the new job, and things are going like a dream. The Zendex has spiked up 20%, and your first meetings with new and existing clients have already begun to put your office on the map. Jan Stewer and his team have been working the phones and hustling like mad, and your structural hedge seems to have paid off; in fact, it's even made a bit more money than you'd anticipated. So far, so good - you are technically a little more than maxed out on the risk limits, but at least you're making money.
You have declared "Plum Brandy O'Clock" on the trading floor, to celebrate the biggest daily profit the office has ever made. Of course, no party in the investment banking industry is complete without a self-invited guest who nobody wants, and yours is Peter Davey, the Regional Head of Business Development for Ruritania, Illyria and Erewhon.
He's a guy about the same age as you, with a job description annoyingly similar to yours, and apparently Tom Pearce at head office (the big boss guy) wants him to be based out of Zenda for a few months. He's perfectly personally charming, but you are old and wise enough not to ignore that tingling sensation in the stab-zone of your back.
Over drinks, he asks you that age-old loaded question, "How can I help you grow your business?"
What do you say?
(link: "Help me deal with the risk and reporting problem")[(set: $compliancereports to "Peter Davey")(goto: "Pass reporting to PD")]
(link:"Go out and drum up some more business!") [(goto: "Keep risk reporting")](set: $pandl = -2000000)
Well, good news and bad news. The Zendex has spiked up 20% in the last two weeks. Jan Stewer and his team have been working the phones and hustling like mad, but your structural short position means that all the trades they do have cost you money.
You tell yourself that this is the price of gaining market share; head office seems to accept this as legitimate, but you know as well as they do that it's an excuse with a very temporary shelf-life - the market share you gain is going to have to be made to pay off later in the year in cold cash.
Someone at head office does make a few pointed remarks about the market share not really going anywhere and asks if you have been spending enough time with clients.
But business is up, and this seems to warrant some sort of celebration, if only to keep up morale. So you institute the new Friday evening tradition of "Plum Brandy O'Clock" on the dealing floor. Of course, no party in the investment banking industry is complete without a self-invited guest who nobody wants, and yours is Peter Davey, the Regional Head of Business Development for Ruritania, Illyria and Erewhon.
He's a guy about the same age as you, with a job description annoyingly similar to yours, and apparently Tom Pearce at head office (the big boss guy) wants him to be based out of Zenda for a few months. He's personally charming, but you are old and wise enough not to ignore that tingling sensation in the stab-zone of your back.
Over drinks, he asks you that age-old loaded question, "How can I help you grow your business?"
What do you say?
(link: "Help me deal with the risk and reporting problem")[(set: $compliancereports to "Peter Davey")(goto: "Pass reporting to PD")]
(link:"Go out and drum up some more business!") [(goto: "Keep risk reporting")](set: $pandl = -100000)
The market is booming, which is obviously great, but you worry that you might be missing your window. The Zendex has spiked up 20% in the last two weeks and everyone is talking about the potential of the Ruritanian market, particularly if a new Chinese export deal is ratified.
Jan Stewer and his team have been working the phones and hustling like mad, but to not that much effect; the level of business is not that much higher than under your predecessor, and your attempts at a daily hedge of the structural short position are not coping too well with the vertical rise of the Zendex.
In your reports to head office, you emphasise how disastrous things would look if you had followed your predecessor's policy of not hedging the structural short, but they only want to hear about market share, and they seem, probably rightly, disappointed with the news you give them.
It's clear that some sort of relaunch is needed, to get things moving again. So you institute the new Friday evening tradition of "Plum Brandy O'Clock" on the dealing floor. Of course, no party in the investment banking industry is complete without a self-invited guest who nobody wants, and yours is Peter Davey, the Regional Head of Business Development for Ruritania, Illyria and Erewhon.
He's a guy about the same age as you, with a job description annoyingly similar to yours, and apparently Tom Pearce at head office (the big boss guy) wants him to be based out of Zenda for a few months. He's personally charming, but you are old and wise enough not to ignore that tingling sensation in the stab-zone of your back.
Over drinks, he asks you that age-old loaded question, "How can I help you grow your business?"
What do you say?
(link: "Help me deal with the risk and reporting problem")[(set: $compliancereports to "Peter Davey")(goto: "Pass reporting to PD")]
(link:"Go out and drum up some more business!") [(goto: "Keep risk reporting")](set: $pandl = 400000)
Two weeks into the new job, and things are going like a dream. The Zendex has spiked up 20%, and your first meetings with new and existing clients have already begun to put your office on the map. Jan Stewer and his team have been working the phones and hustling like mad, and your daily hedging policy has worked pretty well; you are on budget, but clearly with a lot of headroom to expand in terms of risk capacity.
Head office are broadly congratulatory, although sending out their typical mixed messages. They want you to continue to grow market share, although not at the expense of profitability, and of course they want you to sort out your own reporting problems with no help from them.
You decide to cement your popularity with the traders and send out the right messages about growth by instituting a new tradition of "Plum Brandy O'Clock" on Friday afternoon. Of course, no party in the investment banking industry is complete without a self-invited guest who nobody wants, and yours is Peter Davey, the Regional Head of Business Development for Ruritania, Illyria and Erewhon.
He's a guy about the same age as you, with a job description annoyingly similar to yours, and apparently Tom Pearce at head office (the big boss guy) wants him to be based out of Zenda for a few months. He's personally charming, but you are old and wise enough not to ignore that tingling sensation in the stab-zone of your back.
Over drinks, he asks you that age-old loaded question, "How can I help you grow your business?"
What do you say?
(link: "Help me deal with the risk and reporting problem")[(set: $compliancereports to "Peter Davey")(goto: "Pass reporting to PD")]
(link:"Go out and drum up some more business!") [(goto: "Keep risk reporting")]You wake up on Saturday morning with a horrific hangover that hardly clears until Sunday afternoon. Plum Brandy O'Clock might not have been the best of ideas. You make an appointment with your doctor for a general check-up. The rest of the weekend passes in something of a haze. (if:$riskmanager is "Pedr Gurni")[Pedr Gurni is visibly amused at your state when you meet him for coffee.]
The hangover has more or less cleared by Monday morning, and it is time to do the necessary admin. Looking through your email, you see that (if: $riskreports is "PD")[(if: $riskmanager is "Pedr Gurni")[Peter Davey has hired Pedr Gurni to be your risk manager, effective immediately](else:)[Peter Davey has appointed one of his own staff, a guy called Daniel Vitam, to the vacant risk management job]](else:)[(if: $riskmanager is "Pedr Gurni")[Pedr Gurni has accepted your offer and will start as soon as possible](else:)[Head Office have finally provided you with a new Risk Manager. His name is Daniel Vitam.]]
Your intercom buzzes - it is Jan Stewer. He wants to have a word before the start of trading. [[Pick up a cup of coffee and meet him in your office -> week 2 trading position]](if: $position is "long")[(display: "week2long")]
(if: $position is "short")[(display: "week2short")]
(if: $position is "hedge")[(display: "week2hedge")]Jan Stewer is cheerful, as he has every right to be given the state of the budget. "Busy guy, eh?", he notes, pointing at your desk diary. The desk diary is actually empty, but you look at the calendar on your computer and notice that he is right - after today, your schedule of cross-European marketing meetings is so packed that you won't see the office for three weeks. This makes it all the more important to ensure that Stewer knows your priorities for managing the trading risk.
Which is what he wanted to talk to you about. It is kind of hard to admit it, but you both know that your performance so far owes less to the client business you have been doing, and more to the windfall gains on your "structural hedge". Now Jan Stewer is worried. The market has gone too far, too fast, in his opinion, and it might be ready for a sharp correction. This would do quite a bit of damage to the trading P&L. What do you say?
(link:"'The structural hedge is my policy. If we keep putting it on and taking it off, it's not a hedge, it's a trade. Keep it.'")[(set: $position to "long")(set: $pandl to 2500000)(set: $varrisk to 6)(set: $funding to 12)(goto:"overbudgetchoice")]
(link:"'OK, let's drop the hedge for now and look to put it back on at a better price after the market's corrected'")[(set: $position to "short")(set: $pandl to 750000)(set: $varisk to 5.5)(set: $funding to 10)(goto:"overbudgetchoice")]
(link:"'Well, we're far enough ahead of the game to not want to take too many risks. Reduce the hedge, rebalance it every day. Try to end every day with a net flat Zendex position'")[(set: $position to "hedge")(set: $varisk to 4)(set: $funding to 10)(set: $pandl to 1400000)(goto:"overbudgetchoice")]Jan Stewer has two issues on his note pad. First, he wants to know your whereabouts for the next week - you look at your calendar and notice, with alarm, that you will not see the office at all for the next three weeks, as you have back to back marketing meetings all over Europe.
Second, you have asked him for regular market reports, and he is getting nervous. The Zendex has gone too fast, too far, in his opinion and a medium-sized setback could be imminent. How do you want to position the trading book, in the light of this advice? Remember you might find it hard to change your mind over the rest of the month.
(link:"'Well, we're getting a clear risk-on message from head office. Ours not to reason why - our priority is to do business and generate P&L. Max out the VaR limits with Zendex futures and keep them there - only cut back if business volumes fall away'")[(set: $position to "long")(set: $pandl to 1000000)(set: $varisk to 4)(set: $funding to 8)(goto:"overbudgetchoice")]
(link:"'Everyone says risk on, but I think you're right - the last thing we want to do is double up our positions. Let's just carry on as we are.'")[(set: $position to "hedge")(set: $pandl to 600000)(set: $varisk to 2)(set: $funding to 6)(goto:"underbudgetchoice")]
(link:"'Now we're doing so much more commission business, the fluctuations on the book should be less important, so we can stop bothering with the hedging policy. Let's just stop worrying about the trading P&L and concentrate on clients'")[(set: $position to "short")(set: $pandl to -750000)(set: $varisk to 4)(set: $funding to 7)(goto:"underbudgetchoice")]Jan reminds you that you are going to be difficult to get hold of for a while. You look at your calendar and realise he is right - after today, the next three weeks have you on a more or less non-stop travel agenda, taking client meetings all over Europe. And Jan is obviously feeling the pressure a bit, given how far behind budget you are. You ask him what could be done to get the P&L back on track. He seems reluctant to offer an opinion.
"You see, the trouble so far has been that every bit of business we write costs us money. We agree a price with the client, and by the time we manage to get the stock, the market's moved up. So we could revisit the decisions on hedging policy. If we'd had a big long Zendex position in the futures market, our P&L would be much more reflective of what we've achieved so far.
"But it's risky. In my view, the Zendex has gone too far, too fast. If we load up now, we could make things worse. Your call, really boss".
What do you tell him? Remember that your instructions might have to last the whole month.
(link:"'Look, we've got to stop the bleeding. Buy our maximum VaR of Zendex futures and treat it as a structural hedge against business volumes'")[(set: $position to "long")(set: $pandl to 1000000)(set: $varisk to 5.5)(set: $funding to 11)(goto:"overbudgetchoice")]
(link:"'We're doing the right thing, and the worst possible move would be to change our mind, particularly after the market has gone up so far and so fast'")[(set: $position to "short")(set: $pandl to -2500000)(set: $varisk to 5.5)(set: $funding to 12)(goto:"underbudgetchoice")]
(link:"'Let's try and make this a bit less painful, but without taking too much risk. Get the quants involved and try and finish each day with a net flat Zendex position'")[(set: $position to "hedge")(set: $pandl to -5500)(set: $varisk to 5)(set: $funding to 10)(goto:"underbudgetchoice")]
(if: $pandl is 2500000)[You have spent the last month away from the office, on a series of uncomfortable flights around Europe. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. But the meetings have in general been going all right. Clients are interested in Ruritania, and you feel like once the relationships are established, the business will start rolling in.
In the meantime, the Zendex has continued to track upward, and you are benefiting to the full. Client orders have been profitable and the structural hedge has got further and further into the money. You are a little bit outside your risk and funding limits, but you have swapped emails with head office and they are understanding. And so they should be, given the money you are making!
]
(if: $pandl is 750000) [You have spent the last month away from the office, on a series of uncomfortable flights around Europe. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. But the meetings have in general been going all right. Clients are interested in Ruritania, and you feel like once the relationships are established, the business will start rolling in.
If only the business was making money; in fact, Jan Stewer's view on the market was totally wrong and the decision to remove the structural hedge has proved broadly disastrous as the Zendex has ground higher. The client business is coming in, but the book is losing money and your risk limits are straining at the seams. At least you are still broadly on budget thanks to the money you made last month.
]
(if: $pandl is 1400000) [You have spent the last month away from the office, on a series of uncomfortable flights around Europe. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. But the meetings have in general been going all right. Clients are interested in Ruritania, and you feel like once the relationships are established, the business will start rolling in.
As it happens, Jan Stewer was being much too pessimistic when he told you that the market was ready for a fall, but your decision to rebalance the hedge has not really hurt you. You might have made more money if you hadn't reduced it, but you are well ahead of budget, and well within your risk and funding limits too.]
(if: $pandl is 1000000) [What a great feeling to get out of jail! You have spent the last month away from the office, bingeing on booze and room service hamburgers, which will probably come back to haunt you in the long term. But the meetings have in general been going all right and the daily P&L updates from Jan Stewer have been sensational. Despite everyone's caution (or perhaps because of it!), the Zendex has continued to grind higher, and your futures position has been contributing as much to the P&L as all the new business you have been soliciting. The shrewd decision to go risk-on has paid off in spades, and you still have funding and VaR capacity to spare.
]
Now, it looks like Tom Pearce is taking some notice of you. More or less the moment you open the door in Zenda, a message comes in asking you to take the next flight to the US, for some high level meetings on the growth plan for your office. There is also a note from Group Compliance, asking you to put a designated substitute in charge the next time you leave town.
Book your flight to the USA and choose who you will put in charge in your absence:
(link: "Jan Stewer")[(set: $incharge to "Jan Stewer")(goto: "New York over budget")]
or
(Link: "Peter Davey")[(set: $incharge to "Peter Davey")(goto: "New York over budget")]Zendex - 145000
P&L - `$` $pandl
Budgeted P&L for year-to-date: `$`750000
VaR - `$` $varisk m
Funding - `$` $funding m
(if: $pandl is 600000)[The month is heavy going, reminding you of what a physically demanding profession this can be. You trek around Europe, meeting clients and pitching your services. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. The meetings aren't totally a waste of time, cllients are interested in Ruritania, and the business is starting to roll in.
The office continues to grind out the business, and neither the funding nor the VaR are feeling the strain, but the budget is still difficult to achieve. The Zendex continues upward inexorably, and you feel like all your good work is being undone by the cautious hedging policy.]
(if: $pandl is -750000) [The month is pretty sickening, in more ways than one. You trek around Europe, meeting clients, trying to project an optimism which you can't feel, given the horrors of the daily P&L reports. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. The meetings aren't totally a waste of time, cllients are interested in Ruritania, and you feel like once the relationships are established, the business will start rolling in.
But the office is losing money; your decision to remove the structural hedge was pretty disastrous. Ironically, the increase in client business is what has killed you - in a rising market, every new order seems to be losing you money. You are maxed out on VaR now, too.]
(if: $pandl is 1400000) [You have spent the last month away from the office, on a series of uncomfortable flights around Europe. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. But the meetings have in general been going all right. Clients are interested in Ruritania, and you feel like once the relationships are established, the business will start rolling in.
As it happens, Jan Stewer was being much too pessimistic when he told you that the market was ready for a fall, but your decision to rebalance the hedge has not really hurt you. You might have made more money if you hadn't reduced it, but you are well ahead of budget, and well within your risk and funding limits too.]
(if: $pandl is -5500) [You have spent the last month away from the office, on a series of uncomfortable flights around Europe. You can feel your health worsening on late nights, too much alcohol and a diet heavy in room service hamburgers. But the meetings have in general been going all right. Clients are interested in Ruritania, and you feel like once the relationships are established, the business will start rolling in.
And at least the bleeding has stopped - you are no longer losing money with every trade and have a change of clawing your way back to profitability. The year to date P&L is still a red figure, but only a four-digit one. You share a congratulatory lunchtime drink with Jan Stewer as the year's P&L goes into the black, and dream of getting back on budget by the end of the year. Your risk and funding limits are now feeling the strain as the office grows, but this can usually be renegotiated.]
(if: $pandl is -2500000) [The month is pretty sickening, in more ways than one. You trek around Europe, meeting clients, trying to project an optimism which you can't feel, given the horrors of the daily P&L reports. You are sure that your policy of not taking positions is the right one, but you can't ignore the numbers in the P&L - you are now in a hole which will be very difficult indeed to get out of and the only question is when to start renegotiating the budget. You hope that Risk Management will note that you are protecting the bank from the risk of a massive crash, but you are uncomfortably aware that this is going to sound like excuse making. Your risk and funding limits are feeling the strain too.]
Now, it looks like Tom Pearce is taking some notice of you. More or less the moment you open the door in Zenda, a message comes in asking you to take the next flight to the US, for some high level meetings on the growth plan for your office. There is also a note from Group Compliance, asking you to put a designated substitute in charge the next time you leave town.
Book your flight to the USA and choose who you will put in charge in your absence:
(link: "Jan Stewer")[(set: $incharge to "Jan Stewer")(goto: "New York under budget")]
or
(Link: "Peter Davey")[(set: $incharge to "Peter Davey")(goto: "New York under budget")] Good old New York. You have the luxury of a late rise, as the meeting is only at 0930, and you are booked into a good hotel across the street from head office. You pass through the security gates at the same time as the junior and back-office staff, but take the elevator a fair few floors more than they do, getting out at the top management meeting room suite on the 19th.
You have prepared a slide deck, and pass your Powerpoints round the table, but nobody really seems to be looking at them, and you are not called on to talk about the Ruritanian P&L. Tom Pearce makes an offhand reference to the "great work" your "guys" are doing and the fact that you are ahead of budget, but it's clear that he is much more interested in a guy you've never seen before, who entered the room exchanging jokes with him.
This is the guy who passes you a business card, revealing that he is Harry Hawk, from Greymare Capital LLC, a big client.
The meeting kind of blurs into a mass of jokes and back-slapping, but the basic message of the thing is that Greymare want to take a large derivatives position in the Ruritanian credit index - the CreZendo. They would be effectively betting that Ruritania credit spreads would tighten and the CreZendo fall. This would of course leave you with an opposite position, short Ruritanian credit.
You would need to shift the risk by buying a load of Ruritanian bonds, but that will take ages - Greymare are proposing this trade precisely because it's a difficult market to trade in. Getting your risk position back to neutral could take days or even weeks. In the meantime ... What?
Well, the stock market and the bond market usually move together in Zenda - so if Harry Hawk is going to leave you short the bond market, maybe you could buy the stock market? That way, at least if the Chinese trade deal gets inked, you'll make some money on the Zendex while you're losing it on the CreZendo?
Basically this is a risk trade - Greymare want to stick your office with a position that is the opposite of the one you want, and you are going to charge them a handsome fee for the inconvenience. Then you are going to trust in your own superior trading prowess to get rid of the hot potato before it generates losses big enough to wipe out the fee.
The payment that Tom Pearce seems to have negotiated with Greymare seems generous enough, in so far as one can judge these things. And you are multiply reassured that you will be given generous sales credit for the commission on the deal (although this raises a nagging worry in your mind that any trading losses will probably fall to you too). But it looks like everyone is looking to you for the final decision.
In a brief post-meeting meeting, with Harry Hawk duly schmoozed and dispatched, Tom Pearce makes it very clear; he needs a decision from you now. Is this deal the sort of thing that you should be doing, or is it just too risky?
[[taketradeoverbudget <- We'll take it on, but we want full protection from Group Risk for the trading P&L]]
[[failtrackoverbudget <- This is the sort of deal that blows banks up. We shouldn't touch it with a long stick]](if: $incharge is "Jan Stewer")[Tom Pearce looks at you as if you've just trodden something nasty into his carpet, then chuckles. "P&L protection, is it? Come on Bill, don't worry, you can trust me. We'll make sure that you're looked after". This frankly doesn't sound very reassuring, but you get the strong feeling it's the best you're going to get.
This small moment of awkwardness aside, the atmosphere is good. Tom Pearce even promises to take you to dinner with the deal team, to celebrate. You are about to catch the elevator to your old floor to see old colleagues for a victory lap when a junior aide passes you a note.
You glance at your Blackberry and confirm the horrible truth. The Zendex is in free fall - something to do with a Chinese trade deal falling through, or some injudicious statement by the finance minister or something. The office is apparently going crazy and a load of clients want to speak to you.
Tom Pearce is already holding out his hand for a farewell shake and talking about metaphorical rain checks. His assistant volunteers to cancel all your other meetings, including one with Group Compliance, and to change your ticket.
(link:"Go to the airport")[(goto: "back to office Stewer")]]
(if: $incharge is "Peter Davey")["Hard bargain!". Tom Pearce seems delighted. "OK, I'll make a note of that. Make sure you talk to Group Compliance and to the technology boys and get the accounting sorted out - I'm not underwriting your entire desk! But it seems fair enough that the originators should give you some help on the hedging costs". You look around in the hope that someone is making a note of this.
You are clearly doing your career a world of good. Tom Pearce even promises to take you to dinner with the deal team, to celebrate. You are about to catch the elevator to your old floor to see old colleagues for a victory lap when a junior aide passes you a note.
You glance at your Blackberry and confirm the horrible truth. The Zendex is in free fall - something to do with a Chinese trade deal falling through, or some injudicious statement by the finance minister or something. The office is apparently going crazy and a load of clients want to speak to you.
Tom Pearce is already holding out his hand for a farewell shake and talking about metaphorical rain checks. His assistant volunteers to cancel all your other meetings, and to change your ticket.
(link:"Go to the airport")[(goto: "back to office Davey")]]Tom Pearce swallows hard. There are plenty of rumours about this guy that he has killed people with his bare hands when he used to be in US Army special forces, and you can kind of see it now. But after a struggle with his emotions - it probably only lasts a second, but you definitely notice it - he composes himself.
He nods to the compliance representative in the meeting, and in the blink of an eye, he has rewritten history. "Good call, Mr Brewer. You know this business, it's the deals you turn down that matter, not the deals you take on. I'll smooth things over with Harry; he's going to be pretty cross with us, but he'll find someone else to take his deal. If he hasn't already asked everyone else on the street, I guess". That last sentence sounds like it might have a bit of a barb aimed at you, but you have more sense than to rise to it. The meeting breaks up.
You spend the rest of the day catching up with friends, and having a long and pointless meeting in Human Resources about your expat allowances. There is not much else to do, so you take a couple of days vacation, and get a check-up from the company doctor (not good news; he is now giving you specific warnings to change your lifestyle for the good of your heart). Then you [[failtrackbackinofficeob <- make tracks back to Zenda.]]All hell has broken loose. It turns out that there had been some kind of technical problem with your phone, so nobody in the Zenda office has been able to get in touch with your for the last five days. And the Zendex has been falling steadily; not really anything that could be called a "crash" yet, but there were some unfortunate trading errors, and it looks like the year's P&L has been wiped out.
You are tired from the flight, and a little bit hung over from some unwise decisions about gin&tonics in the lounge, but the old familiar adrenalin gets running as you walk through the trading floor to your office. You sit down and cancel all your missed calls - anyone who really needs you will call again. And before you can do anything, you need to get back on top of the situation.
(if: $incharge is "Peter Davey")[(link: "Call Peter Davey")[(goto: "pdringtone1")]]
[[stewer1 <- Talk to Jan Stewer]]Jan Stewer bounds into your office with the air of a guy who is about to make a lot of excuses. And his opening line is one of the top ten all time greats - "Don't worry boss, it's not as bad as it looks".
Apparently, a few hours after you caught the plane to New York, a massive order came through from Greymare Capital, selling a load of index futures. You were out of contact, so you weren't able to approve the breach of risk limits personally, but nobody wanted to lose this kind of business - "it could have made our year!" - and so the office took on a large long position in order to fill Greymare's order as quickly as they demanded.
So, you think, Harry Hawk was sitting there pitching his CreZendo trade, in the knowledge that his other desk was already pushing us over our risk limit. So we'd end up committed to doing about twice as large a trade with him as we'd ever normally allow. Nice guy ...
There are a few more non-standard aspects to the trade, but it's not really all that complicated - Greymare has placed a massive negative bet with your bank, you have taken it on and it's currently making money for them and losing it for you.
The number of contracts involved is closer to twenty times the normal daily trading volume on the Zendex exchange than to ten, and it's going to take a fair few weeks to trade out of it. Just what you didn't need with your first quarterly appraisal coming up ... You turn to Jan and say:
[[dump1 <- Well, we'd better start now then. Dump our contracts as quickly as we can; don't lose more than we have to, but let's get out of this as quick as we can]]
[[end5 <- Well, we need to be careful and do this slowly. Trade out of the position, but keep losses to a minimum. The market might always bounce back]]Zendex - 11000
P&L - $-2m
Budgeted P&L for year-to-date: $1.5m
VaR - 9
Funding - 16
Pure pain, day after day after day. The Zendex continues to spiral downwards and market liquidity dries up, making it even more difficult to unwind your positions. Despite your best efforts to keep things tight, rumours leak out that your bank has a big trade to unload, and the market moves against you day after day. By the end of the month you are looking at the wreckage of your once-profitable business, and wishing that you at least had a bit of commission from Greymare to cheer it up. Tom Pearce's secretary has been on the phone, booking a time slot for your assessment, and you know you need to do a bit of sharp talking; someone from Group Compliance has also asked to sit in, wanting to discuss a few things about the way the office is managed.
(if: $incharge is "Peter Davey" and $riskreports is "You")[(link:"Prepare your assessment form, then head to the videoconference room.")[(goto: "end1")]]
(if: $incharge is "Peter Davey" and $riskreports is "PD")[(link:"Prepare your assessment form, then head to the videoconference room.")[(goto: "end2")]]
(if: $incharge is "Jan Stewer" and $riskreports is "You")[(link:"Prepare your assessment form, then head to the videoconference room.")[(goto: "end3")]](if: $incharge is "Jan Stewer" and $riskreports is "PD")[(link:"Prepare your assessment form, then head to the videoconference room.")[(goto: "end4")]]What a bad decision. You curse your own stupidity a dozen times over the next week. There is no quiet approach, not when you're working a trade that big. The whole street in Zenda knows what's going on - it can only be a matter of time before the girl in the coffee shop asks how you're doing with those Zendex futures. Every day you and Jan Stewer strategise together, but none of these plans work.
And group compliance are on your back too. Now that the office is losing money, none of your limit breaches are being swept under the carpet, and Tom Pearce is demanding a daily conference call. Your breath has been getting shorter and shorter over the last few days too. People keep asking if you're all right.
Then the straw arrives which breaks the camel's back. A report comes in from your local compliance team, and you can see the future in black and white before you. Jan Stewer has been hiding positions, and the true size of the loss is ...tens? Of millions? No, maybe that was how big it was a few days ago. By now, those positions will be in the hundreds. But someone else will have to sort this mess out, because you are seeing your vision swim, feeling a stabbing pain in your chest which radiates down your left arm, and you are falling, falling into the darkness.
THE ENDThe phone rings and rings. You send a text message and several emails, but Peter Davey is not answering. You try asking the office administrators, but they don't seem to know anything either. Someone says he might be in the Illyria office, but when you ring them they say they think he's in New York. You curse him under your breath, then [[stewer1 <- call for Jan Stewer to try to make sense of things]].Tom Pearce is on the screen and he is not happy. "I'm going to make this short, Bill", he snaps. "We're closing down our operations in Ruritania, Illyria, Erewhon and the rest of them. Can't afford to be losing this kind of money, with nothing to show for it."
You make a half hearted protest, but after the last month, your heart is hardly in it. The rest of your assessment passes in a blur; you don't actually get a particularly bad score on most of the metrics, but you can be sure that being the man at the tiller when the Zenda office hit the rocks is going to be a further blight on your career. Tom Pearce makes a similarly half hearted gesture at finding you another post if you come back to New York, but it seems unlikely that many of the existing desks are going to want to clear out budget space for a failed MD. It is left hanging in the air between you, but it's never a good sign when the big boss gives you a number in HR and tells you to call them to "get all the options out on the table".
When you get back to your desk, however, there are a couple of interesting messages for you. There's an invitation to a quiet getting-to-know you drink from one of your competitors - maybe they're going to be setting up a Zenda office. There's also a somewhat worrying-looking written memo from the risk guy, $riskmanager, asking you some questions about Jan Stewer's trading book and some unauthorised activity in it. You quickly guess that one way or another, your decision has been made regarding relocation versus redundancy, and it's with a slight sigh of contentment that you quickly dash off an email to HR, slide the compliance envelope in the direction of Peter Davey and head for the door. Tomorrow is another trading day ...
THE ENDTom Pearce is in avuncular mood, which seems strange to you, as all the news you receive from him is ghastly in the extreme. Jan Stewer has been running a set of unauthorised trading positions, the office is several tens of millions further in the red than you thought and everything is totally to hell. Peter Davey has been fired, and it looks like the whole of the Ruritanian, Ilyrian and Erewhonese businesses will be shut down. Group Compliance is apparently incandescent.
But nobody blames you! This is a quite surreal experience, but your status seems to, if anything, have been improved by the disaster. All that Tom Pearce seems to remember is that you made your revenue budgets, and that you were the lone voice warning against the GreyMare trade (which is, apparently, doing horrific damage to some of the competition). You're being brought back to New York, to work on Pearce's own business development staff until a new adventure can be found for you. Nobody knows how, but it appears you have escaped with a single bound.
THE ENDWell, Peter Davey has stitched you up good and proper, it seems. He is in the videoconference room with Tom (although you frankly never remember being told you reported to him), and he has a long list of your transgressions and failings. The assessment is a bloodbath; although nothing is said so distinctly, you end it feeling like you have no alternative but to resign. As soon as you have found another job ...
... And weirdly, just as you are calming down and trying breathing exercises to reduce your blood pressure, a call comes in, on your mobile, from Harry Hawk. He's in Zenda and would like to be taken to dinner - he's asking if you have any recommendations to make for a really good head of local trading. Maybe you do ...
The risk guy, $riskmanager meets you as you head for the door, with a kind of greyish look to him. There is something pretty nasty hanging around in an errors-and-ommissions account administered by Jan Stewer, apparently. Deftly, you tell him that this sort of thing is the responsibility of Peter Davey these days, and slip out into the street.
THE ENDYou were expecting it to be bad, but this is awful. It seems that Peter Davey took it kind of as a personal snub when you didn't leave him in charge of the office in your absence, and he has spent the last month in New York, making mischief at your expense.
Worse, the financial position is significantly different from what you thought it was. To the tune of twenty five million dollars. Twenty five million dollars, and growing, of trading losses, all hidden in Jan Stewer's desk drawer. Davey has been invited into the video conference room with Tom Pearce - this would be very irregular if this was an ordinary assessment, but it isn't. It's a blame exercise, and you appear to be the only item on that particular agenda.
The loss isn't all that big in the grand scheme of things; it will barely rate a mention at the bank's quarterly results presentation. But it's enough to do for your career. Maybe you'll be able to pick up work somewhere else, further down the food chain of investment banking and at a lower salary. But for the time being, you've got a couple of hours to clean your desk, and a very unpleasant phone call to make to your ex-wife's lawyers.
THE ENDYou arrive in the office after a restless sleep on the flight, and everything is in chaos. The daily P&L report is all over the place, and it is clear that, even in a market where everyone seems to be losing money, your desk has done diabolically.
Jan Stewer is practically stuttering as he tries to get his excuses in early. Apparently, a few hours after you caught the plane to New York, a massive order came through from Greymare Capital, selling a load of index futures. You were out of contact, so you weren't able to approve the breach of risk limits personally, but nobody wanted to lose this kind of business - "it could have made our year!" - and so the office took on a large long position in order to fill Greymare's order as quickly as they demanded.
So, you think, Harry Hawk was sitting there pitching his CreZendo trade, in the knowledge that his desk was already pushing us over our risk limit, so we'd end up committed to doing about twice as much exposure to him as we'd ever normally allow. Nice guy ...
There are a few more non-standard aspects to the trade, but it's not really all that complicated - Greymare has placed a massive negative bet with your bank, you have taken it on and it's currently making money for them and losing it for you. The number of contracts involved is closer to twenty times the normal volume than to ten, and it's going to take a fair few weeks to trade out of it.
Jan Stewer is in a state of panic and with good reason - apparently the whole street in Zenda knows that you have a big loss-making position to shift, and that means that the market is likely to continue to free-fall until you have shifted it. This is the sort of situation in which things get very ugly. Stewer is clearly going to be no help though, his nerves are shot. You send him out of your office with instructions to get a detailed report together.
Left alone, you find yourself cracking a smile, because things have just got potentially rather interesting. The CreZendo trade and this big futures sales seem to be taking opposite views on the Ruritanian market. Maybe Harry Hawk and his guys are playing some ever-so-clever relative value trade between the credit index and the equity index, or maybe Greymare is so big these days that one part of it doesn't know what the other is doing.
But whatever they're up to, one thing is clear - the hedging plan for the Crezendo trade was to take a big long position in Zendex futures, and the net effect of the futures trade is to leave your office with a big long position in Zendex futures. You're actually really very close to where you want to be.
And that means ... Well, that means that if "the whole street" in Zenda knows that you have a huge position you need to shift, then the whole street in Zenda thinks it knows something which isn't actually true. And that's the sort of situation in which it's possible to make a very great deal of money indeed.
If everyone is selling the index in the belief that you're going to have to capitulate and dump your book, then when they find out that you're not going to, the Zendex is quite likely to rocket when they need to cover their own positions. So the thing to do, starting from your current broadly neutral position, would be to start slowly buying Zendex futures and building up a long position. Time to set the wheels in motion ...
If you decide to involve Jan Stewer in this plan, [[call him now -> involve Stewer]]
If you decide to leave Jan Stewer out of the loop, then you are going to have to work with New York. [[Call up Tom Pearce's office -> call pearce]]
Or you can decide that this whole plan is too risky, and [[just sit tight with the neutral position you have -> sit tight]]You arrive in the office after a restless sleep on the flight, and everything is in chaos. The daily P&L report is all over the place, and it is clear that, even in a market where everyone seems to be losing money, your desk has done diabolically. Jan Stewer is practically stuttering as he tries to get his excuses in early. Apparently, a few hours after you caught the plane to New York, a massive order came through from Greymare Capital, selling a load of index futures. You were out of contact, so you weren't able to approve the breach of risk limits personally, but nobody wanted to lose this kind of business - "it could have made our year!" - and so the office took on a large long position in order to fill Greymare's order as quickly as they demanded.
So, you think, Harry Hawk was sitting there pitching his CreZendo trade, in the knowledge that his desk was already pushing us over our risk limit, so we'd end up committed to doing about twice as much exposure to him as we'd ever normally allow. Nice guy ...
There are a few more non-standard aspects to the trade, but it's not really all that complicated - Greymare has placed a massive negative bet with your bank, you have taken it on and it's currently making money for them and losing it for you. The number of contracts involved is closer to twenty times the Zendex's normal daily volume than to ten, and it's going to take a fair few weeks to trade out of it.
Jan Stewer is in a state of panic and with good reason - apparently the whole street in Zenda knows that you have a big loss-making position to shift, and that means that the market is likely to continue to free-fall until you have shifted it.
This is the sort of situation in which things get very ugly. Stewer is clearly going to be no help though, his nerves are shot. You send him out of your office because you need to talk to Peter Davey and get the whole story.
Irritatingly, Davey is in New York rather than in Zenda, which raises a few questions in your mind about what Compliance would say about leaving him in charge. But fair enough to the guy, he has clearly been keeping a close eye on things. In particular, he doesn't trust Jan Stewer. And also fair enough, he isn't doing what you thought he would do and trying to run as fast as possible from the unexploded bomb which is your P&L account.
"Bill, that guy is out of control. We had the Greymare trade, fair enough, but I signed off on that one and the exposure really wasn't all that far outside of limits.
But Stewer has been buying index futures without telling me - I don't know why, but I had to pretty seriously kick his ass. It's his fault that we're so long Zendex, not Harry Hawk's. We're going to have some scars on our backs before we can trade out of this one, buddy."
You crack a smile, and let Peter in on your good news - that you have just agreed a trade in New York in which Harry Hawk is taking the opposite view. Maybe Harry Hawk and his guys are playing some ever-so-clever relative value trade between the credit index and the equity index, or maybe Greymare is so big these days that one part of it doesn't know what the other is doing.
But whatever they're up to, one thing is clear - the hedging plan for the Crezendo trade was to take a big long position in Zendex futures, and the net effect of the futures trade is to leave your office with a big long position in Zendex futures. You're actually really very close to where you want to be.
And that means ... Well, that means that if "the whole street" in Zenda knows that you have a huge position you need to shift, then the whole street in Zenda thinks it knows something which isn't actually true.
And that's the sort of situation in which it's possible to make a very great deal of money indeed. If everyone is selling the index in the belief that you're going to have to capitulate and dump your book, then when they find out that you're not going to, the Zendex is quite likely to rocket when they need to cover their own positions.
Peter Davey is impressed and relieved. You can hear the grin in his voice as he finishes your thought for you ... "so, if we either sit tight on our position, or maybe even get a bit more long, then we sit it out, and when everyone has maxed out betting against us, we let the short squeeze begin! Oh Bill, Bill, if you were any prettier I'd kiss you!".
You chuckle. But Peter has another point to make. "But the thing is, between the CreZendo trade and Stewer's screwing about, we are kind of flying blind here. I am literally not sure how far long the desk is. We might even be net short now, for all I know. And of course, the systems don't talk to each other. We are going to need a hell of a lot of help from risk managment. Let's conference them in".
(if: $riskmanager is "Pedr Gurni")[(link:"Conference in $riskmanager")[(goto: "Riskmgr is Gurni")]]
(if: $riskmanager is "Daniel Vitam")[(link:"Conference in $riskmanager")[(goto: "Riskmgr is Vitam")]]
Or you can [[decide that this whole plan is too risky, and just sit tight with the position you have -> sit tight]]You buzz Jan Stewer back into your office and explain the situation to him. He practically faints; it's clear that he was taking his responsibility for the Greymare trade really to heart. You agree between you that the most likely outcome is for the Zendex to continue to slowly crumble for a couple of weeks, and then to stabilise, at which point the short-squeeze will continue in earnest. You instruct him to buy futures accordingly.
It is a tricky trade, though. It will be hard to know what sort of risk you are taking, because the reporting of the CreZendo trade is not really properly integrated with your own systems, so you will only have a rough idea of how far long the Zendex you are. To get even that rough idea, you are going to need a lot of help from your risk manager.
(if: $riskmanager is "Pedr Gurni")[(link:"Conference in $riskmanager")[(goto: "Riskmgr is Gurni2")]]
(if: $riskmanager is "Daniel Vitam")[(link:"Conference in $riskmanager")[(goto: "Riskmgr is Vitam2")]]A nasty surprise awaits you when Tom Pearce's office calls back - it is Peter Davey, and he has been assigned responsibility for this operation. Already within ten minutes of phone conversation, you have to remind him twice that he is not your boss.
The two of you do agree on one thing though - if Jan Stewer cannot be trusted to maintain confidentiality in things like the Greymare trade, it is best to keep him out of this. Your trades will be routed through the New York office and your local P&L will not reflect them, or the economics on the CreZendo trade.
Davey also makes what you have to acknowledge is a good point, which is that although it is going to be necessary to pull the wool over Jan Stewer's eyes, you don't want to be fumbling in the dark yourselves. Getting the reporting right is going to be the key to success here - the CreZendo trade is difficult to hedge, and of course the credit systems and the index futures systems were developed by different IT departments and don't talk to each other. You are going to need a lot of help from risk management to simply know if you are long or short.
(if: $riskmanager is "Pedr Gurni")[(link:"Conference in $riskmanager")[(goto: "Riskmgr is Gurni")]]
(if: $riskmanager is "Daniel Vitam")[(link:"Conference in $riskmanager")[(goto: "Riskmgr is Vitam")]]Over the days that follow, your P&L bleeds bright red. Just as you expected, the market can't rise while there are rumours of a big position hanging over it. The reporting problems never seem to have been solved, so it is hard to tell what the true daily losses are, but it seems to you that you are losing more than you expected to lose on your long Zendex position, and making somewhat less than you expected on the daily mark-to-market of your Crezendo position.
You are also being asked by the exchange to continually post more and more cash to cover your losses, while the cash being put up by Greymare is not finding its way to you. This is putting intolerable strain on your funding, and head office are demanding that you reduce it. Fay Widdicombe, head of Global Group Compliance, is going to be paying a visit next week.
As you see it, there are two options:
[[Ask Tom Pearce to get Group Compliance off your back <- Ask Tom Pearce to get Group Compliance off your back]]
[[Start selling index futures at your end to reduce your exposure <-Start selling index futures at your end to reduce your exposure]]
This is a conference call which goes really badly. Tom Pearce kind of explodes at you. You are left under no illusions about what he thinks of you and your office, and it is very clear that no help will be forthcoming. Towards the end of the call, he seems to be indicating that the Greymare CreZendo trade is also going badly wrong, and you fear that you might be made a scapegoat for that too.
The news gets back to Fay Widdicombe, your supervisor in Global Group Compliance, and she is distinctly unamused that you have gone behind her back. The meeting with her starts off frosty and gets worse.
"I've seen traders in your position a dozen times", she says. "Your positions have spiralled out of control. You're probably twenty million dollars underwater. All we can do now is try and minimise the damage, so I need a list of exactly the steps that you're going to take to find a client who is prepared to buy our index futures, presumably at a discount".
Your head is reeling a bit. What is she talking about? The loss is nowhere near that big. Do you say:
[["I think you must have some figures wrong. Are you combining head office positions with ours?" -> challengefigures]]
[["OK, I don't necessarily think it's as bad as that, but let me make some phone calls and get back to you". -> getback]]Selling futures into this market is painful beyond belief. You are getting constant headaches and feeling out of breath every day, but compared to Jan Stewer, you're the picture of health. He seems to be falling apart rapidly, muttering under his breath and losing his temper at the junior staff. The P&L is now reaching levels at which New York want a daily conference call about it.
You get a call from Fay Widdicombe at Group Compliance. You presume it's about the visit, and start to talk about hotels, but she quickly patches through Tom Pearce himself. She asks you if you are in your office, and when she has established that you are off the trading floor, she tells you the bad news.
Jan Stewer has disappeared, leaving a note explaining that there is a problem in the Zendex book. And there is; he has been systematically falsifying the position records, and the loss is probably into the hundreds of millions. The bank is going to close the office down, but in the circumstances, it is felt that it would not be appropriate for you to remain as manager to supervise the run-down. Instead, they have a new role for you, as "regulatory scapegoat". You hire your own lawyers, but they don't do much good. Your career in the markets is over.
THE ENDFay is even less amused than she was at the beginning of the meeting. She does not speak, but passes a single piece of paper across the table to you. It's a confirmation letter from the Zendex futures exchange. And it's terrible news. Clearly, your daily reports have been totally misleading. You gulp water and start to think what can have happened, but then suddenly your vision goes dim.
It turns out that you suffered a small heart attack in that conference room. It also turns out that Jan Stewer had run up some massive unauthorised losses in your absence.
Everyone blames you for failing to supervise the office, but this is more or less academic; you have already decided that you need to get out of this job before it kills you. The bank makes some noises about suing you, but it never gets round to it; you even manage to get a consultation with a cardiologist on your insurance before it is cancelled. Back in New York, you start looking for another job. Winter is closing in.
THE ENDYou know that there is only one call to make - the only person who can release you from this disaster is the person on the other side of the trade. Harry Hawk. Preparing yourself for the worst, you walk back to your desk and prepare to dial his number in New York.
As you reach for your phone, it starts ringing; you have picked it up before you really know what you are doing. The voice on the other end is half-familiar. "It's Dana Longley, from the Zenda Business Journal. Can I talk to you for a second about some market rumours, please?". Do you say
[["Can't talk now, important calls to make" -> dont talk to Dana]]
[[ "OK, can we make it quick" -> talk to Dana]]You put the receiver down and call Harry Hawk. He doesn't talk much, and he allows you to pour your heart out for five minutes, recriminating about his firm's behaviour in pushing your risk limits, admitting that you're way under water and beyond maxed out on funding, and so on. He then interrupts you, naming a trade size and a price, the latter of which gives you a horrible vomiting sensation of losing millions at a stroke. You gulp, and agree.
Harry Hawk chuckles, not unkindly, and then makes a comment of his own. "Of course, Bill, as far as I can tell, this only gets you out of about half of your long Zendex position. That head of trading of yours, Stewer, has been all over the street these last few weeks. To me, he looks like he might be a rogue. I hope for your sake that you're on top of this". Badly rattled, you make your excuse and get off the line.
It's all true. Fay Widdicombe confirms it to you when you return to your office. Jan Stewer has been systematically deceiving you and has built up a huge unauthorised position. The losses from the Zenda office are definitely going to end up being mentioned in the quarterly results. None of it is really your fault, but you look like an unbelievable mug for letting this all go on in an office which you were nominally in charge of. Your career, you strongly suspect, has ended here.
THE ENDDana's market rumour has you reaching for the headache tablets, because it is horribly plausible, and if true, it would explain a lot. She has been talking to a contact at the Zenda Futures Exchange, where they are worried about the size of your firm's positions. She quotes a number that would be about double the number of index contracts that you have been seeing in your daily reports, but which would be consistent with the losses that Fay has been talking to you about. Somewhere in your office, there is a rogue trader.
You hold Dana off with promises of an exclusive and get Harry Hawk on the phone. A strange calm descends on you as you dispense with all formalities and ask him for a quote on a very large position in Zendex futures. The price he quotes you makes you gulp involuntarily, but you manage to get the word "done" out, and then return to tell Fay Widdicombe the ...good news? Or is it bad news? Compared to how badly things could have gone, it has to be considered good news.
Of course, Harry Hawk is happy to collaborate with Dana Longley on her story, and as the news hits the wires that your overhanging position is cleared, the Zendex soars; he makes a small fortune at your expense.
It turns out that the rogue trader was Jan Stewer - this makes it kind of your fault, but although Tom Pearce feels like he has to fire you to keep the regulators happy, nobody in the industry seems to blame you. You pack up your apartment in Zenda and consider starting your own hedge fund. But first, a holiday, for the good of your health ...
THE ENDPedr Gurni has been working on your reporting systems for a while now, and he is quicky able to confirm Peter Davey's suspicions - while it's arguable whether or not one could describe Jan Stewer as a "rogue trader" in the strictest sense, his positions are out of control, and rather than being nearly hedged, your office is in fact substantially more long the Zendex than you our Peter Davey had guessed.
This is more than a little bit awkward, as it seems that the general market perception - that your firm has a big long position that it would rather get rid of - is technically true, and that the only thing the market doesn't know is that the inadequacies in your reporting mean that head office doesn't know about the position, and you might be able to hush it up until it turns a profit. This is definitely not the situation you had hoped you were in.
Gurni has further bad news. As you explain the structure of the Greymare trades to him, he nods his head and says "I would guess they're speculating on the Kobli story". When you press him for more, he tells you a story that sounds horribly plausible.
The mining and industrial company Unkltomkobli AG, with its charismatic proprietor Tomas Kobli, is the largest conglomerate in Ruritania, and as a result is the largest weighting in the CreZendo index. It is also one of the largest components of the Zendex. According to Pedr Gurni, the persistent rumour in Ruritanian government circles is that Tomas Kobli has made some powerful political enemies, and the Treasury Ministry is proposing to nationalise Anktomkobli.
This would, of course, be something of a disaster for share prices in Zenda - forcible nationalisations are just the sort of thing that international investors run from. But Ruritania has historically had a policy of refinancing the debt of its nationalised industries, and the government itself is very financially sound indeed - it has a better credit rating than most European sovereigns. Due to the technicalities of the way that the CreZendo is calculated, nationalisation would be a highly positive event.
So Greymare would make money on its long credit position, and make money on its short Zendex position. And, of course, your positions are the exact mirror image of Greymare's.
Peter Davey is kind of shell shocked by this sequence of revelations. "Duuuuude", he moans. "This is over the top. We can't handle this on our own. We need to start getting out of these positions, and we need to get Tom involved".
[[Do you agree -> get TP involved]]
[[Or do you overrule him and say that you at least need to confirm the rumours before panicking -> TP out of loop]]Daniel Vitam has been working on steadily improving the reporting systems, and he reckons that it should not be too much work or take too long to give you the integrated P&L and position reports that you need.
But he has another, somewhat more serious problem to bring to you - it seems that Peter's suspicions are justified. Jan Stewer might not exactly be a "rogue" trader, but his risk book is entirely unbalanced and significantly bigger than it was ever authorised to be. You are substantially more long the Zendex than you had expected to be.
This is going to make the whole operation somewhat more tricky; although the market does not quite understand your position, the general suspicion that you are holding onto a bigger long position than head office will let you finance is closer to the truth than you'd like.
The risk is not so much of a problem - group risk management have taken to ignoring your reports because they are so far from reality after the booking of the CreZendo trade. But the funding issue has come to a head; the Zenda futures exchange wants a lot of collateral, and Group Treasury have been on the phone demanding that you reduce the amount of financing you are taking from them.
You need to deal with this issue first. Is your decision ...
[["Basically, tell Group Treasury to go and screw themselves. We'll think about the funding after we've got out of this position at a profit" -> tough it out]]
[["Let's sell some options, or do something else in a longer dated market which generates cash now to reduce the balance of funding. It will come back in the long term, but we can deal with that then" -> sell options]]
[["Tell them that it's a client position that we're funding and that the cash will arrive in a couple of days" -> client position]]Tom Pearce, it is fair to say, loses it. He is angry with himself for not seeing that Harry Hawk was up to something. He is angry at Jan Stewer for concealing losses. But mainly, he is angry with Peter Davey and you, because you are there in front of him.
There is no hope of rational decisions or careful management. You do not see the behind the scenes negotiations with Harry Hawk, but you hear that your bank has paid a pretty penny to get out of the CreZendo trade.
What you do see is massive volumes of orders going through the Zendex futures market, each one of them at a lower price. They are all coming out of the corporate treasury and risk management department in New York, but you know that you will end up taking the blame for every one of them.
And the irony is, it was probably all unnecessary. The nationalisation of Unkltomkobli never does get announced - it was just another one of those rumours that fly by in the night. You return to New York and start talking to some of your old clients, while waiting to be fired. Everyone in your bank knows that it would be a career limiting move to ever mention the country of Ruritania, or the city of Zenda.
THE END.You ruffle through your contact book and wish you had made more of an effort to cultivate friends in the town of Zenda. You decide to give a call to Dana Longley, markets reporter from the Zenda Business Journal. She has always seemed suspiciously well informed about your firm; you have never worked out who her mole is, though. She is noncommital about the Unkltomkobli rumours - sure she has heard them, but there's nothing that the ZBJ would be interested in printing yet. In return, though, she wants to ask you about Greymare.
"Bill, can you help me out here? I'm hearing the name of Greymare Capital here there and everywhere on the street today. Clearly they've got some very big positions - they're the number one name on the Zenda street. Even hearing that people are having to bend their single counterparty exposure rules to cope with them. What's going on? Are they facing redemptions?"
You sense a potential ally. Do you say:
[["Can't comment on client positions, you know that Dana. Let me call Tom Pearce in New York and I'll ask him what I can tell you?" -> tell TP now]]
[["I'll tell you what I can. They've got a big bet on Anktomkobli nationalisation. Keep my name out of it" -> handle self]]
With a little bit more information, you find it a lot easier to make the call to Tom Pearce. He has another few pieces of the picture, and he gives you an advance warning that Group Compliance are having trouble making your risk management figures add up - there is a distinct suspicion in New York that your office has a rogue trader. But you mainly start talking about Greymare.
Apparently, the rumours are true that Greymare is experiencing redemptions, and is getting a little bit strained in its ability to raise finance for margin calls. Tom snarls a bit when he hears your news from Dana Longley on the Unkltomkobli angle to his trade, and the three of you spend some time recriminating about the sneakiness of Harry Hawk.
You remember the rumours about what your swashbuckling chief executive used to get up to in his days as a Navy SEAL, and think to yourself that you really wouldn't like to be on the wrong side of your boss when money is on the line. His voice is really quite scary, as he mutters "margin trouble? Let's see if we can't give them a bit more margin trouble".
The next morning, even before the market has opened, Harry Hawk is calling you up, spraying expletives and threats of legal action. He can threaten what he likes, though - he is short of cash and the New York office have just decided to terminate their financing on his CreZendo trade. To keep his fund alive, he has to cash in his only profitable positions - the short Zendex futures position that has been causing you so much trouble.
You decide that the time for sportsmanship is over, so immediately on getting off the phone with Harry Hawk, you tip off Dana Longley that Greymare is a forced buyer.
This has a predictable effect on the market; having closed near to 10000 the previous night, it opens at 10500 and keeps rising. It opens up the next day and keeps on rising once more - you sell your last contract at 12010, and have an average exit price in the 11000s. You have made back all the losses and more.
By the end of the week, all is done. Group Compliance still has some questions on the size of your long Zendex positions, but you feel happy in handing these over to your risk management team, as nobody is going to look too closely at these deals. "There's no such thing as an unauthorised profit", you mutter to yourself as you close down your computer and pour yourself the first plum brandy of the evening.
THE ENDDana thanks you and rings off. You and Peter Davey kick ideas around, but the market is closed and the working day is over. You go home, unhappily - you realise that you are beginning to get out of breath climbing the stairs to your apartment.
The morning brings another kick in the neck. You get out of the shower at 6am and pick up your mobile phone, to see that you have 31 missed calls, all of them from Harry Hawk. You switch off the mobile and go to work, figuring that the evil hour can be delayed if not cancelled, but he gets through to you on your work line at around nine. It must be the middle of the night in New York.
Harry is hissing with anger. "Two things, Bill. Two things. First, I don't want you to EVER talk about my business with newspaper journalists. Bad mistake buddy. Second, you might be interested to know that Tomas Kobli is about to be arrested on tax fraud charges, and his company will be nationalised before the close today. Ask your risk management department what that will do and get Tom Pearce to call me back. And you can be very sure indeed that I will be discussing your utterly unprofessional behaviour with Tom when he speaks to me."
Dana must have given you away. This looks bad. Do you:
[[If you call Dana up to ask her what the hell she is playing at -> shout at Dana]]
[[If you call Peter Davey to ask his opinion -> call PD]]You get through to Dana at the third ring and immediately start to tell her what you think of her. You have gone on for long enough to get most of your rage out when she tells you "He's lying". You stop in your tracks.
"I don't know how he found out about you talking to me, but I promise I didn't tell him, Bill. I did check a couple of facts with him, but he must have just put two and two together." You are, frankly, not sure you believe this. But the next piece of information Dana gives you is pure gold.
"But he's just not telling the truth about Kobli. They can't be about to arrest the guy, because he's in Illyria all this month. All my sources are saying that Unkltomkobli is sorting out all its tax problems by handing back some mining licences. That's going to be bad for the credit, but there's no big nationalisation in the offing."
You inform Dana that she is forgiven, occasioning something of a sigh, and hang up. A quick email to Tom Pearce, copied to group risk management, and the work is done. You tell Peter Davey to get in front of a Bloomberg screen and watch the show.
Harry Hawk is beset on all sides by troubles. The CreZendo trade is beginning to go against him, and the opening of business in New York brings an immediate demand for more collateral and a refusal to roll over financing from your bank, along with a few others. The word must be spreading about his redemption troubles.
The market rumours are now reversed, of course; rather than talking about you needing to get rid of a long position, everyone is talking about Greymare, having to get out of a short position. The Zendex begins its sharpest rise in decades.
Later on, you hear that Tom Pearce was really quite cruel to Harry when the guy was pleading for the life of his fund. But well, it's a tough world in investment banking, and you know that could have been you. You pour yourself a celebratory plum brandy at the end of the day - one more week, and then you'll look after your heart.
THE END.Peter is even more demoralised than he was yesterday. "Oh man, we are so fucked", he moans. "Nice knowing you, Bill, but I don't see how either of us is going to survive this one". You know that he is probably right. You send for Pedr Gurni, to see if there is anything that can be done to save the situation.
Pedr's jaw drops when he sees you. "Boss, are you OK? You look kind of ...grey". You try to reassure him, but you find that you can't get up from your chair. Gurni, thankfully, springs into action. He insists on calling an ambulance and getting you straight to hospital, where you discover that you have spent the morning suffering from a series of minor heart attacks.
You never get to hear what happened, as the doctor is very strict at refusing to allow you any financial news. Certainly, it turned out that Harry Hawk's fund blew up and that your bank declared a small loss for the quarter, but Peter Davey still seems to be in a job according to his LinkedIn profile. You never go back to banking; you return home and start a bakery.
THE ENDPeter Davey looks at you slightly askance, but he agrees that it's worth a shot. Between the two of you, you draft an email that you think strikes the right balance between confidence, agression and professionalism.
It doesn't work. Of course Daniel Vitam has blown the whistle on you, and the moment that Group Compliance hear about Jan Stewer, they are all over the phones screaming "Rogue!" and demanding that positions are closed down. You are left helplessly watching the screen, seeing orders flood through the Zendex from New York, losing money hand over fist in the most clueless and unnecessary way possible.
It is not your problem for much longer. You and Peter Davey are both instructed to hit the bricks before the week ends. You drown your sorrows in the airport bar, promising to stay in touch when you get back to the states and help each other out with job hunting, but deep down, you know you won't.
THE ENDEveryone kind of gasps, but nobody says no. Daniel Vitam works out how much cash you need and what orders you need to place to get it, and Peter Davey starts to make the trades. You return to your own desk and consider the future. You have now made what might turn out to be a decision with far-reaching consequences - you are concealing a loss and increasing your leverage in order to do so. By any reasonable standard of judgement, you are a rogue trader. If the market goes up, you will be out of trouble, but if it goes down, this decision is going to look awfully hard to justify.
The market ...goes sideways. Half way through the morning, your phone rings. It is Dana Longley of the Zenda Business Journal, asking you for market colour.
"A lot of selling activity, we're hearing, but there's one big buyer who is taking up all the volume", she says. Well, you know who that is. "Are you hearing anything about the rumour that they're thinking of nationalising the mines?"
You grunt something to the effect that you've heard it and don't believe it, but somehow, it has started your adrenalin running. You are terribly vulnerable to anything like that which might make the market take a sudden jump downward, and you know that there is at least one big player out there - Harry Hawk - who has an incentive to start rumours. Do you:
[[Tell Peter Davey "I've got a bad feeling about this market - we need to reverse course" -> reverse course]]
or
[[Count to ten, walk round the block and keep buying the market -> keep buying]]Peter Davey looks at you with a raised eyebrow, and you can hear Daniel Vitam drawing breath in through his teeth. This really feels like it's crossing a line; it's going to be hard to get the plan to work if you're going to limit yourself to telling white lies. You notice that neither of them are volunteering to be the ones making this particular phone call.
You stumble through a series of half-truths with the group treasury, suggesting to them that the excess positions are something to do with the Greymare trade, which nobody understands. You strike lucky, as Tom Pearce is apparently on the road, so nobody can immediately check up on you. Sweating copiously and feeling worse than you have for weeks, you return to your desk and watch the market drift sideways.
The afternoon is just beginning to go into its final session, around the time that the New York trading day is starting, when you get a phone call from Harry Hawk. He is furious with you.
"Bill, what are you talking about? I've just got a call from your bank telling me to post collateral, and when I ask them what the fuck, they are telling me that you said I was doing options business with you. What is this? We have no positions other than the CreZendo trade, and the futures sale at the beginning of the month. I don't know what kind of back-office fuck up this is, but I want it cleared up, and there will be consequences for this when we talk about commissions later in the year. I don't have time for this kind of thing. I expect to see a message from your bank before the close today, explaining and apologising".
Do you:
[[Call up New York and tell them it was a mistake and Greymare isn't behind the positions -> own up]]
or
[[Keep your head down and hope they sort it out between themselves -> dont own up]]
Peter is looking at you with pretty badly disguised contempt - he clearly thinks you have lost it. "I think you might need a rest, big man. You're not looking too good". You shrug at him, and start trying to trade out of your positions. The market moves against you, of course, but only slowly, and you think you might be able to reduce things down to a level where you can explain them to head office.
You are still at your desk trading when the security guards arrive to drag you downstairs. Peter Davey has blown the whistle on you, giving head office a version of the truth which substantially whitewashes his own role and puts you and Jan Stewer firmly in the frame. You can wave goodbye to this year's bonus, and probably to any future in the industry - your priority right now has to be to stay out of jail.
THE ENDYou calm yourself down. What will be, will be and if it turns out to be jail and disgrace, so be it. There is nothing to do but watch the market and see how things unfold.
The rumours about the Unkltomkobli nationalisation drift across the wires, but they don't really seem to have much of an effect on the market - maybe it was already in the price. You swig coffee and order doughnuts every half hour.
The transactions you have carried out have bought time, but you know that the whole show will need to be doubled up in a few days if the market hasn't moved - a sideways market will, in the end, kill you just as effectively as a crash. You feel a bit short of breath and wish you'd looked after your health a bit better since landing in Zenda.
Then, about half an hour before the close, a miracle seems to happen. The market lights up with orders, and begins to rise sharply. The rumours that are now doing the rounds all concern Greymare, and apparent large redemptions that are making Harry Hawk close out all his positions. Whatever it is, it is working, and the market rises 15% over the next four days. Your positions are now in enough profit to close them out.
You spend almost a whole further day with Daniel Vitam, constructing a version of reality which can be safely reported to head office, but you know that the only figure they will really look at is the bottom line of the P&L. The office is still somewhat below budget, but you feel like you are on the right track.
Peter Davey congratulates you and invites you out for a beer, as the rest of the floor opens the plum brandy. The two of you know that you've been through a very strange patch, and you also know that you've crossed a line - the next time a problem arises, the temptation to conceal it will stil be there. But, survival is nine tenths of success, and you're still here.
THE ENDYou sigh and write an email to Treasury, "clarifying" your earlier lie with a series of new lies. You forward the return email on to Harry, in the hope that it will shut him up. Then you have a stroke of brilliance.
You call up Tom Pearce, telling him that you've had a "weird" interaction with Harry Hawk and that he seems very concerned about margin calls. You wait fifteen minutes, then get Peter Davey to call him up and say the same thing. Then fifteen minutes after that, you ask Daniel Vitam to put a "routine" request in to confirm the terms on which you are dealing with Greymare Capital.
Treasury departments and prime brokerage operations are often slow to get things done, a slowness that you are relying on for your own purposes. But they occasionally have very sensitive antenna to signs of danger of any kind. There have been rumours of redemptions at Greymare floating about for a while, and your series of calls are just enough to convince the Treasury guys that, whether or not Greymare are the counterparty to your big financing need, it might make sense to haul back on the firm's exposure right now.
That is the straw that breaks the camel's back for Harry Hawk. He has been operating with too much leverage for too long, and he is forced to sell profitable positions. The rumours spiral out of control within a day or two, and he is soon forced to liquidate his profitable short position in Zendex futures - and the liquidation process quickly turns it into an unprofitable one for him, and a very profitable one for you. You have saved your career for the short term, and although you don't doubt that Harry Hawk is a nasty enemy to have made, short term survival is a necessary condition for long term success. You and Peter Davey crack open a bottle of plum brandy at the end of the week, and swear to never let yourselves get into such a position again.
THE ENDYou decide on the hedgehog strategy - roll up into a ball and hope your problems go away. They don't. Harry Hawk loses his temper about an hour earlier than his deadline and manages to get through to Tom Pearce directly to demand an answer. And then, as it were, the shit hits the fan.
Harry's complaint triggers exactly what you didn't want - a big internal inquisition about whose Zendex futures positions these are anyway. It doesn't take long to realise that they're Jan Stewer's, and as soon as people start asking questions, Peter Davey and Daniel Vitam quickly throw you under the bus as the guy who made the decision to conceal them. This year's bonus expectation is a fond past memory, and your career in investment banking too. Right now, as you catch a plane back home for New York, what you need is a good attorney. Your priority has to be to stay out of jail.
THE END.You make your way over to Pedr Gurni's desk and start to explain the situation to him, and how you need him to pull together an integrated view of the Zendex futures trading book and the CreZendo trade, to get an idea of what your aggregate position really is. You mention that it's not obvious what Harry Hawk and Greymare are trying to do, seemingly taking opposite positions on the Ruritanian market with the two trades.
Gurni looks back at you, as if a light has been switched on. "Maybe they're trying to trade on the Unkltomkobli nationalisation?".
All of your instinctive fire-alarms go off. You ask Pedr to explain further.
"It's been all over the local grapevine - I don't think it's made the newspapers yet. But the word is that Tomas Kobli, the mini-oligarch guy, is on the wrong side of the government, and he could end up getting his mining assets nationalised. Just trying to think of an event that would be positive for the credit but negative for the stock market ..."
And of course, he is right. The nationalisation of Ruritania's biggest mining and industrial conglomerate, and the potential imprisonment or worse of its most prominent businessman, would most likely trigger a stampede on the part of international equity investors.
But Anktomkobli is the biggest borrower in the CreZendo, and one of the most overstretched, and the Ruritanian government has historically had a policy of immediately refinancing the debt of its nationalised industries. So you'd expect to see credit spreads tighten and equity markets plummet, meaning that Greymare would make a fortune on both sides of the trade. And your own positions, of course, are a mirror image of Greymare's ...
You are only half listening to Pedr Gurni, but it seems like he is saying out loud all the things that you are thinking. The market is closed for the evening, but you are going to need a plan for tomorrow. You call Jan Stewer into the office for an impromptu council of war. Do you say:
[["We can't do anything about the CreZendo trade, but we need to get the book short Zendex, stet. Start selling futures early on tomorrow and don't stop" -> sell a load]]
or
[["Priority has to be to get the CreZendo trade hedged. I'll call Tom Pearce as soon as I can" -> hedge and call Pearce]]You walk round Daniel Vitam's office and tell him, in broad outline, what's going on. You set up a meeting for the three of you, mid-morning tomorrow and ask Vitam to get all of the data in shape by then. He grumbles, as this will require a late night, but you impress on him that it's important. You spend the evening having social drinks with Peter Davey and take an almost sinful pleasure in keeping your secret from him.
Early the next morning, you see that you have three missed calls from Daniel Vitam the night before, so you drop by his office to make sure that everything is going to be ready for the meeting. He practically leaps out of his seat when he sees you, and thrusts a load of papers under your nose.
"Look at this, boss!". He starts with a detailed explanation, but you quickly wave him to shut up, as the papers are talking for themselves. Your head of trading, Jan Stewer, has been running big unauthorised positions for the last month, repeatedly doubling up on his losing bets. All this time, he's been lying to you. The true Zendex long position is almost double what you thought it was, and your underlying losses are in the mid-teens of millions. And you were about to be buying more!
The two of you sit in your office, waiting for Stewer to show up for the planning meeting. He can see from your faces as soon as he walks through the door that the game is up. He stutters apologies and seems to be not far off tears. You tell him to be quiet.
[[Do you fire him on the spot -> fire Stewer]]
[[Or do you decide to leave this decision until later -> dont fire Stewer]]You start your operation in the morning with the Zendex at 10050, and the first few sales go through quite easily. But it doesn't take long for the news to get out that your bank is selling, in size. Obviously this immediately resurrects the rumours of a large position, and the market starts to move away from you, quickly. By ten o'clock, you have got your book to a broadly neutral position, according to Pedr Gurni's reports, but at a big cost - the Zendex is now at 9800 and you have a paper loss of more than `$`5m for the day.
You stop for a cup of coffee, and a quick consultation on how many futures you need to sell; the VaR limits are long since blown, but your financing is actually holding up quite well, as all the sales so far have tended to reduce the amount of collateral you need to hold at the exchange. Your telephone rings.
It is Dana Longley, markets reporter for the Zenda Business Journal. You had expected something from her, so you prepare your spiel; client position, ordinary business, no comment, et cetera et cetera. But she isn't willing to be put off like this.
"I've got a source that says that you've got a rogue trader, Bill. I won't publish anything until I've checked it with New York, but can you confirm this for me? I've checked with the exchange, and they won't tell me anything, but you're selling a lot of contracts here.."
You deny the rumour angrily, but it has shaken you up a bit. Then Pedr Gurni walks up to your desk, with a grey tinge to his complexion and a sheaf of printouts.
Jan Stewer has been sitting on an unauthorised position for the last two weeks. You have been roughly twice as long as you thought you were, and the losses are more than double. You tell Pedr to sit tight, not to say anything to head office and that you can trade your way out, but he shakes his head. He has always been a by-the-book kind of guy.
Tom Pearce goes berserk, and immediately orders you out of the building. Apparently the positions are wound down under the oversight of Peter Davey, and apparently he makes a fair old mess of doing so. The Unkltomkobli nationalisation doesn't get announced after all, but this hardly matters to you. You are back in New York, negotiating a severance package and spending your days talking to investigators.
THE ENDYou are psyching yourself up to call Tom Pearce when your mobile buzzes with an incoming call. It's Dana Longley, markets reporter from the Zenda Business Journal. She has always seemed suspiciously well informed about your firm; you have never worked out who her mole is, though. But it can hardly be a coincidence that this evening, she is asking about Greymare.
"Bill, can you help me out here? I'm hearing the name of Greymare Capital here there and everywhere on the street today. Clearly they've got some very big positions - they're the number one poster of collateral on the Zenda street. Even hearing that people are having to bend their single counterparty exposure rules to cope with them. What's going on? Are they facing redemptions?"
You sense a potential ally. Do you say:
[[ "Can't comment on client positions, you know that Dana. Let me call Tom Pearce in New York and I'll ask him what I can tell you?" -> consult TP]]
[["I'll tell you what I can. They've got a big bet on Unkltomkobli nationalisation. Keep my name out of it" -> grass Greymare]]Peter Davey picks up the phone in Tom Pearce's office - those two seem to be close to each other these days - and you find yourself pouring your heart out to him He has another few pieces of the picture, and he gives you an advance warning that Group Compliance are having trouble making your risk management figures add up - there is a distinct suspicion in New York that your office has a rogue trader. But you mainly start talking about Greymare.
Apparently, the rumours are true that Greymare is experiencing redemptions, and is getting a little bit strained in its ability to raise finance for margin calls. Peter conferences Tom in when he hears your news from Dana Longley on the Unkltomkobli angle to his trade, and the three of you spend some time recriminating about the sneakiness of Harry Hawk.
Later, when it is all over, you hear that Peter Davey and Tom Pearce exchanged a big smile when they decided what to do. At the time, on the phone, all you pick up is the chuckle in Tom Pearce's voice when he says "margin trouble? Let's see if we can't give them a bit more margin trouble".
The next morning, even before the market has opened, Harry Hawk is calling you up, spraying expletives and threats of legal action. He can threaten what he likes, though - he is short of cash and the New York office have just decided to terminate their financing on his CreZendo trade. To keep his fund alive, he has to cash in his only profitable positions - the short Zendex futures position that has been causing you so much trouble.
You decide that the time for sportsmanship is over, so immediately on getting off the phone with Harry Hawk, you tip off Dana Longley that Greymare is liquidating. This has a predictable effect on the market; having closed near to 10000 the previous night, it opens at 10500 and keeps rising. It opens up the next day and keeps on rising once more - you sell your last contract at 12010, and have an average exit price in the 11000s. The losses are more than covered, and this is going to be a vintage year for you.
By the end of the week, all is done. Group Compliance still has some questions on the size of your long Zendex positions, but you feel happy in handing these over to your risk management team, as nobody is going to look too closely at these deals. "There's no such thing as an unauthorised profit", you mutter to yourself as you close down your computer and pour yourself the first plum brandy of the evening.
THE ENDDana signs off, reasonably happy with the tip. You try to get through to New York, but nobody is answering the phone. You sit in the office until the lights go off and the cleaning staff arrive. As you are heading for the door, a text message shows up on your mobile. It is from Peter Davey, and it just says "WE KNOW. SIT TIGHT".
You take this advice to heart, and postpone any decisions until you get further instructions. Half way through the next morning, you are just biting into a doughnut when the phone rings. It is Harry Hawk himself, direct from New York.
He doesn't bother with more than token pleasantries. "Hi Bill, Harry Hawk here. Just wanted to let you know that the Unkltomkobli nationalisation is going to be announced in two hours. From what we're hearing, Kobli himself is on a plane out of the country, one step ahead of the treasury police. Just wanted to keep you in the loop, give you a chance to cover your book."
All you can do is thank him for the heads-up; he doesn't seem to want to stay on the phone to answer any details. On the screen, the Zendex is still rising, but the nationalisation news will most likely hit this rally like a bag of sand, leaving you with a loss that really can't be concealed from head office. What to do?
[[Call Dana Longley to ask what she's hearing -> ask Dana]]
[[Call Peter Davey to ask what to do -> ask PD]]Dana listens to you pass on the rumour and tuts. "That's not what I'm hearing at all. I'm hearing that Kobli is back in favour, and that he's gone to the Ministry of Resources to announce a big new concession win. What's Harry playing at?"
The pieces all fit together. Harry is playing a game of "trying to spook Bill out of his position". You wait ten minutes and the call you were expecting comes through - it's Harry again, claiming to have closed out his CreZendo trade at a profit with another broker, and making you a fairly derisory offer to take out your futures position. He doesn't seem too phased when you turn him down, but he should be.
The market drifts up, and then you get a call you really hadn't expected. It is Harry again, and this time he is pretty desperate. Tomas Kobli has appeared, arm in arm with the treasury minister, and it is clear that the CreZendo half of Greymare's trade is a broken thesis. You note with amusement that he doesn't even bother to pretend that he wasn't lying this morning about having got out of it. He is now offering you market price for the future position, as well he might. But you don't trade for as long as you have without learning to smell blood in the water, so you hold out and force him to pay a premium for size.
The market continues to drift upward, which puts you in a better mood than you would otherwise have been when Pedr Gurni walks in with some news. Jan Stewer has been concealing positions, and your book is still long the Zendex. But you can live with this; not too much money has been lost, and it's just a matter of firing Jan Stewer. By the time Peter Davey calls up, on behalf of Tom Pearce, you are able to give the impression of a matter under control. The P&L of the Zenda office is still pretty much a disaster, but it looks like you have consolidated your reputation as a safe pair of hands, and there are plenty of other frontier markets where the bank wants to put your experience to work ...
THE END.Peter panics, it is fair to say. He can't stop gabbling at you. It turns out that "WE KNOW" in his text message last night referred to the fact that Jan Stewer has been running big unauthorised positions on your trading book. Someone should apparently have kept you in the loop about this, but nobody apparently did - by a convoluted chain of reasoning, Peter Davey is blaming you for this yourself, and you have to admit, it isn't going to look good in the eventual inquisition.
After a quick and terse exchange of views, it is decided that Tom Pearce will call Harry Hawk and offer him a fancy price to close out the two halves of his trade. All questions of your office being given any sort of P&L protection on this are very much in the past tense - you have been set up as the scapegoat for a loss that will probably have to be mentioned in the quarterly accounts.
And the sickest joke is that it turns out that Harry Hawk was lying. That afternoon, you feel the taste of vomit in the back of your throat as you watch TV coverage of Tomas Kobli announcing a new mining licence, practically cuddling the Treasury minister as he does so. This adventure of yours to Zenda has been a real disaster in career terms. You draft a resignation letter, hoping to quit while you still have some semblance of your health intact.
THE ENDYou snarl through tight lips, doing your best imitation of Clint Eastwood. "Get out and clear your desk". Stewer manages to keep his composure as he shuts the door, but you can see him sobbing outside your office. He is gone by the time that you and Daniel Vitam have finished your strategising.
All the strategising is, of course, in vain. As soon as Jan Stewer's shoes hit the pavement outside, the whole market seems to know every detail of your situation. And as New York wakes up, you are immediately deluged in angry phone calls demanding full accounting of how you managed to harbour a rogue trader for so long. All your ideas of trying to manage the position fall on deaf ears; head office wants the mess cleared up as soon as possible, and doesn't care about the cost. You place the necessary orders in a sort of fugue state, knowing that every move you make is costing more and more money. By the time the books are closed, three days later, Jan Stewer's unauthorised losses have reached `$`120m.
Once the madness has subsided, head office suddenly remembers that it does actually care about the cost. You are not brought into the criminal investigation, but you receive a number of ranting phone calls from Tom Pearce, and one cutting exchange with Peter Davey as he brings you the news that you are being fired. You are really not sure how you could have played things differently, but it's a tough world in investment banking.
THE ENDStewer cannot look you in the eye, and you know that you can't let him near a trading desk, but you decide that the situation is too delicate to deal with the complications involved in firing him right now. You get him to confirm the exact details of the positions report that Daniel Vitam has compiled, and then set him to work on a big report and to compile all the traders' annual objectives for HR.
On the basis of your new management reporting, you see that you are now basically net long the Zendex. The market seems to have stabilised, and you would guess that as people reconsider their views on whether your bank is going to sell, things could start turning round pretty quickly. You return to the trading floor and start dealing for clients, trading in and out of the market to keep a feel for what's going on, but otherwise just sitting tight and waiting. Daniel Vitam gets on the phone to the group treasury, trying to talk them down from doing anything precipitate with your funding.
Your telephone rings. It is Dana Longley, a markets reporter from the Zenda Business Journal. Normally she rings you for general chat and "colour of the market" comments, but today she has a decidedly more businesslike tone to her voice.
"People are telling me that you've fired Jan Stewer, Bill. Does this have anything to do with that massive futures position you're sitting on?". You immediately start to categorically deny it, but she doesn't want to give up on her story. "Well, I'm going to have to check back with my sources, but it really seems to me like there's something going on here. The rumours are moving the market. What's your side of the story? What can you give me, on the record?".
You could really, really, do without this, just as the rumours were beginning to die down. Who is passing her this stuff? But then Dana says something which really sparks your interest. "In particular, I'd like to know a bit more about this Greymare trade." This is out of control. You need to find out what she knows, find out as much as you can about who told her, and get as much spin of your own onto the record. Do you say:
[["Let's meet for coffee, fifteen minutes, round the corner from our office" -> Dana coffee]]
or
[["Come round here after the close, I'll show you Jan Stewer so you can see he's still here" -> Dana office]]You pick up a sheaf of Daniel Vitam's paperwork and head out for a cafe round the corner from your office. Dana Longley is already there. You get through the pleasantries and chitchat fairly quickly and then get down to business. She has clearly got a good source, but your efforts to find out who it might be are getting nowhere. So, strictly off the record, you show her your risk management report. It actually looks pretty good for your desk - the net position in Zendex futures is substantial, but not really out of the normal run of business. It certainly doesn't look like there's a massive rogue trader overhanging the market.
She points at the big offsetting short position which is Daniel Vitam's best guess at the equivalent exposure on the CreZendo trade. "Who's the other side of that?" she asks "Harry Hawk?"
You try to compose your features into a telling-you-not-telling you kind of lopsided grin. "Couldn't say", you reply. "Why not ask Harry?". You guess that she will, and venture a question of your own. "What were you saying earlier about Greymare having a trade?"
Her reply is long and extremely interesting, and relates to Unkltomkobli, the mining and resources conglomerate owned by the eponymous Tomas Kobli, Ruritania's richest man.
The smart money is beginning to think that Kobli is out of favour with the current government, and that Unkltomkobli could be nationalised. Apparently, nearly every senior civil servant in Zenda has been fielding calls, dinner invitations and, allegedly, bribes from Greymare Capital, trying to sleuth out what's going on.
You try to keep a poker face, but fire-alarm bells are ringing in your head. If Unkltomkobli gets nationalised, that would most likely be terrible news for the Zendex, but the bond spreads would immediately narrow - Ruritania is a cash rish country, more than able to pay the debts of even its most leveraged nationalised industries.
And Unkltomkobli is not only the biggest constituent of the CreZendo but its worst credit - the company has become heavily overstretched by its expansion spree. Harry Hawk is clearly betting on an event that would be good news for credit and bad news for the stock market, making him a load of money on both sides of the deal. And of course, your office's position is the exact mirror image of Greymare's. Trouble indeed. Unless ...
Well, unless it isn't. The trade is clever, you can see that. But it's got a funny feeling to it in your view - it's just a little bit too clever for its own good. If everything happens according to plan and on the right timescale for Greymare, then Harry Hawk is going to do your bank over just perfectly. But there are many slips between cup and lip in an operation of this sort. You chat in general terms to Dana, but your mind is racing.
Back at the office, you formulate a plan of action. Do you:
[[Buy more futures in the market tomorrow, to see if you can shake Greymare out of their position -> buy to spook Greymare]]
or
[[Phone Peter Davey in New York to see if he can help -> phone PD for help]]At the end of the trading day, you pick up a sheaf of paperwork and head out to a bar at the edge of Zenda's business district with Jan Stewer. Dana Longley shows up about half an hour after you do You get through the pleasantries and chitchat fairly quickly - you are alert to any signs of strain in Jan's presence, but he seems to be projecting his usual air of breezy confidence. Perhaps he doesn't know how much trouble he is in? At a prearranged signal, he leaves to go home.
Once Jan has gone, you get down to business. She has clearly got a good source, but your efforts to find out who it might be are getting nowhere. So, strictly off the record, you show her your risk management report. It actually looks pretty good for your desk - the net position in Zendex futures is substantial, but not really out of the normal run of business. It certainly doesn't look like there's a massive rogue trader overhanging the market. Keeping your poker face steady, you tell her to ring up Tom Pearce in New York if she wants to confirm things, hoping very much that she won't, or at least, not before you have got things turned round.
She points at the big offsetting short position which is Daniel Vitam's best guess at the equivalent exposure on the CreZendo trade. "Who's the other side of that?" she asks "Harry Hawk?"
You try to compose your features into a telling-you-not-telling you kind of lopsided grin. "Couldn't say", you reply, but nod as you are doing so. You venture a question of your own. "What were you saying earlier about Greymare having a trade?"
Her reply is long and extremely interesting, and relates to Anktomkobli, the mining and resources conglomerate owned by the eponymous Tomas Kobli, Ruritania's richest man. Apparently, the smart money is beginning to think that Kobli is out of favour with the current government, and that Anktomkobli could be nationalised. Apparently, nearly every senior civil servant in Zenda has been fielding calls, dinner invitations and, allegedly, bribes from Greymare Capital, trying to sleuth out what's going on.
You try to keep a poker face, but fire-alarm bells are ringing in your head. If Anktomkobli gets nationalised, that would most likely be terrible news for the Zendex, but the bond spreads would immediately narrow - Ruritania is a cash rish country, more than able to pay the debts of even its most leveraged nationalised industries. And Anktomkobli is not only the biggest constituent of the CreZendo but its worst credit - the company has become heavily overstretched by its expansion spree. Harry Hawk is clearly betting on an event that would be good news for credit and bad news for the stock market, making him a load of money on both sides of the deal. And of course, your office's position is the exact mirror image of Greymare's. Trouble indeed. Unless ...
Well, unless it isn't. The trade is clever, you can see that. But it's got a funny feeling to it in your view - it's just a little bit too clever for its own good. If everything happens according to plan and on the right timescale for Greymare, then Harry Hawk is going to do your bank over just perfectly. But there are many slips between cup and lip in an operation of this sort. Your mind is racing as you say your goodbyes to Dana and head back to your apartment.
By the next morning, [[you have formulated a strategy -> the plan]]You start buying futures early after the open, and it looks as if things are working. Oddly, there is no story from Dana in the morning's ZBJ, so it seems that the rumours of a rogue trader might have been put to rest by your intervention yesterday. The market responds to your buying and your positions start to make money. You even put Jan Stewer back on answering the phones, to make it clear to the market that he is still around. This might work ...
Then you get a screaming phone call from Tom Pearce. Apparently Dana Longley called him up shortly after meeting you, to check some of your numbers. One thing led to another, and he is now fully aware of Jan Stewer's positions. And he is angry. When he hears that you have been buying more futures, he seems to achieve a sort of escape velocity. He demands that you immediately stop, and start trading out of your existing long position. This is exactly what you had been scared of - head office are panicking and trying to do things too fast. This is going to cost money.
The Zendex closes down another 3% at 10200, and then gaps down the following day, and the day after. Your losses have reached ten million dollars by the end of the week, when Tom Pearce is finally satisfied that the trading book is broadly market neutral.
Then the bomb drops; Tomas Kobli has fled the country and Anktomkobli AG is going to be nationalised. There is a fierce political debate over whether the debts should be nationalised, so it looks like Greymare are not going to make as much money as they thought they might, but this hardly matters for you. Your losses triple in the next two days, and it looks very much as if you are going to be out of a job. At least you have the small satisfaction of telling Jan Stewer to hit the bricks, and handing his personnel file over to the police.
THE END.Peter Davey picks up the phone in Tom Pearce's office - those two seem to be close to each other these days - and you find yourself pouring your heart out to him He has another few pieces of the picture, and he gives you an advance warning that Group Compliance are having trouble making your risk management figures add up - there is a distinct suspicion in New York that your office has a rogue trader. But you mainly start talking about Greymare.
Apparently, the rumours are true that Greymare is experiencing redemptions, and is getting a little bit strained in its ability to raise finance for margin calls. Peter conferences Tom in when he hears your news from Dana Longley on the Anktomkobli angle to his trade, and the three of you spend some time recriminating about the sneakiness of Harry Hawk.
Later, when it is all over, you hear that Peter Davey and Tom Pearce exchanged a big smile when they decided what to do. At the time, on the phone, all you pick up is the chuckle in Tom Pearce's voice when he says "margin trouble? Let's see if we can't give them a bit more margin trouble".
The next morning, even before the market has opened, Harry Hawk is calling you up, spraying expletives and threats of legal action. He can threaten what he likes, though - he is short of cash and the New York office have just decided to terminate their financing on his CreZendo trade. To keep his fund alive, he has to cash in his only profitable positions - the short Zendex futures position that has been causing you so much trouble.
You decide that the time for sportsmanship is over, so immediately on getting off the phone with Harry Hawk, you tip off Dana Longley that Greymare is liquidating. This has a predictable effect on the market; having closed near to 10000 the previous night, it opens at 10500 and keeps rising. It opens up the next day and keeps on rising once more - you sell your last contract at 12010, and have an average exit price in the 11000s. All the losses are covered and it looks like it will be a great year!
By the end of the week, all is done. Group Compliance still has some questions on the size of your long Zendex positions, but you feel happy in handing these over to your risk management team, as nobody is going to look too closely at these deals. "There's no such thing as an unauthorised profit", you mutter to yourself as you close down your computer and pour yourself the first plum brandy of the evening.
THE ENDThe morning arrives, and with it, a small market report by Dana Longley which quotes you saying something boring about client positioning. You can guess that the news has got round town like wildfire though, because the market starts to rise. You even take the risk of putting Jan back on the phones to buy a few contracts, sending out a clear message to the markets. This looks like it might turn into a good day.
Half way through the morning, you are just biting into a doughnut when the phone rings. It is Harry Hawk himself, direct from New York.
He doesn't bother with more than token pleasantries. "Hi Bill, Harry Hawk here. Just wanted to let you know that the Unkltomkobli nationalisation is going to be announced tomorrow. From what we're hearing, Kobli himself is on a plane out of the country, one step ahead of the treasury police. Just wanted to keep you in the loop, give you a chance to cover your book."
All you can do is thank him for the heads-up; he doesn't seem to want to stay on the phone to answer any details. On the screen, the Zendex is still rising, but the nationalisation news will most likely hit this rally like a bag of sand, leaving you with a loss that really can't be concealed from head office. What to do?
[[Change course and start selling -> change course and start selling]]
[[Call up Tom Pearce's office to tell them that trouble is on the way -> call TP]]You reverse course and start selling contracts, but the Zendex keeps on rising; you are still long, but you are not making anything like as much money as you thought. Volume on the exchange has gone through the roof, and you are able to trade out of a lot of Jan Stewer's rogue positions. You keep looking at the news screen, but there does not seem to be any official announcement of the nationalisation, or of Tomas Kobli.
The next day, the market goes up again, with the volume higher and higher. Harry Hawk calls you again, reiterating that the announcement is imminent, but this time with a bit more panic in his voice. You are beginning to wonder whether he knows as much as he thinks he does.
Finally, with a gasp of relief, you fill the last contracts and get rid of the massive structural long. Jan Stewer's rogue trades are gone, and the office is back to neutral. You bought the index futures at around 12000, and have sold them at prices between 10000 and 11500, so you are even further behind budget than you were, but you have survived and put the scandal behind you. You will probably have to come clean to head office about why you are firing Stewer, but it is always easier to deal with these things outside the context of an imminent crisis. The Zenda office is unlikely to be your ticket to the big time, but at least you are still trading.
THE ENDYou can feel a rock in your stomach as you call up Tom Pearce's office and ask to speak to the big guy. It is important to make sure that the inevitable losses don't come as a total surprise to him, but it is going to be tricky to finesse the subject of the rogue trader positions. You catch a glance of Daniel Vitam working in his office at the end of the trading floor and feel guilty - it is probably going to be necessary to throw him under the bus if you are going to pass off the whole thing as a failure of risk management.
Tom's perspective on the whole matter is significantly more interesting, though. He actually chuckles when he hears that Harry Hawk has been making "helpful" phone calls to you. Tom gives you the benefit of his own wisdom.
"Bill, we're hearing that Greymare are experiencing big redemptions. They've got this Ruritanian trade on which might turn out profitable for them - thanks for the heads-up on that, and I appreciate that you were cautious about the whole thing. But it's killing them on the financing in the mean time. We're making them post collateral every time the market goes up on the Zendex half, and their other brokers aren't letting them use the collateral they're receiving on the CreZendo half. Seems to me that Harry didn't really learn enough of a lesson from the crisis. They've just been a little bit too clever for their own good and they're running out of time. Now what I want you to do is to buy index futures for the rest of the day"
You keep buying, and the market keeps rising. You keep one eye on the news wire, looking out for the story about Unkltomkobli, or anything else that could spoil things. But no story arrives. What does appear is a story bylined by Dana Longley, with several quotes from you and from Tom Pearce, making public the rumours about Greymare Capital having redemption difficulties, and making it clear that they have a large short Zendex position to liquidate.
The market rockets. It is back up about 12000 by the close. Harry Hawk gets through to you once in the afternoon, raving and spitting and threatening all sorts of legal action against your bank, but he is a busted flush. The CreZendo trade is quietly closed out at a small loss to your bank, but Greymare have been forced to liquidate all their index positions, leaving you making money on all your Zendex trades, including Jan Stewer's rogue operation. You are still going to sack him, but you allow him to attend the party that the desk throws that night to celebrate a day on which you made over ten millilon dollars of trading profit.
THE ENDYou find it hard to enjoy the familar sights of Old New York, as you can't get rid of a nervous heartburn, almost certainly related to the meeting which you are going to have to explain to Tom Pearce that you are below budget. At least you have the luxury of a late rise, as the meeting is only at 0930, and you are booked into a good hotel across the street from head office. You pass through the security gates at the same time as the junior and back-office staff, but take the elevator a fair few floors more than they do, getting out at the top management meeting room suite on the 9th.
You have prepared a slide deck, and pass your Powerpoints round the table, but nobody really seems to be looking at them. There are a few ritual expressions of disappointment that your business isn't making its budget, but it's clear that Tom Pearce is much more interested in a guy you've never seen before, who entered the room exchanging jokes with him.
This is the guy who passes you a business card, revealing that he is Harry Hawk, from Greymare Capital LLC, a big client.
The meeting kind of blurs into a mass of jokes and back-slapping, but the basic message of the thing is that Greymare want to establish a large position in the Ruritanian credit index - the CreZendo. They would be selling protection, effectively betting that Ruritania credit spreads would tighten and the CreZendo fall. This would of course leave you with an opposite position, short Ruritanian credit.
You would need to shift the risk by buying a load of Ruritanian bonds, but that will take ages - Greymare are proposing this trade precisely because it's a difficult market to trade in. Getting your risk position back to neutral could take days or even weeks. In the meantime ... What?
Well, the stock market and the bond market usually move together in Zenda - so if Harry Hawk is going to leave you short the bond market, maybe you could buy the stock market? That way, at least if the Chinese trade deal gets inked, you'll make some money on the Zendex while you're losing it on the CreZendo?
Basically this is a risk trade - Greymare want to stick your office with a position that is the opposite of the one you want, and you are going to charge them a handsome fee for the inconvenience, then trust in your own superior trading prowess to get rid of the hot potato before it generates losses big enough to wipe out the fee.
The payment that Tom Pearce seems to have negotiated with Greymare seems generous enough, in so far as one can judge these things. And you are multiply reassured that you will be given generous sales credit in your own P&L for the commission on the deal (although this raises a nagging worry in your mind that any trading losses will probably fall to you too). But it looks like everyone is looking to you for the final decision.
In a brief post-meeting meeting, with Harry Hawk duly schmoozed and dispatched, Tom Pearce makes it very clear; he needs a decision from you now. Is this deal the sort of thing that you should be doing, or is it just too risky? The way he emphasises the impact of the deal on your own currently inadequate P&L suggests strongly to you that he is expecting a positive answer.
Do you reply [["We'll take it on, but we want full protection from Group Risk for the trading P&L" -> taketraderunderbudget]]
Or do you reply [["This is the sort of deal that blows banks up. We shouldn't touch it with a long stick" -> underbudgetfailtrack]](if: $incharge is "Jan Stewer")[Everyone seems to gasp slightly at your audacity, but Tom Pearce looks at you and nods. "I see your point Bill. Don't worry. I don't want this deal to change anything about the economics of your office. We'll split the hedging P&L fifty-fifty as a first assumption, and if it turns out that this isn't working, come back to me". This is great news. You smile as a junior vice-president makes a note.
Whatever your office's share of the commission on this transaction, you can tell from the mood in the room that New York will be taking a lot more. Tom Pearce even promises to take you to dinner with the deal team, to celebrate. You are about to catch the elevator to your old floor to see old colleagues for a victory lap when a junior aide passes you a note.
You glance at your Blackberry and confirm the horrible truth. The Zendex is in free fall - something to do with a Chinese trade deal falling through, or some injudicious statement by the finance minister or something. The office is apparently going crazy and a load of clients want to speak to you.
Tom Pearce is already holding out his hand for a farewell shake and talking about metaphorical rain checks. His assistant volunteers to cancel all your other meetings, and to change your ticket.
(link:"Go to the airport")[(goto: "back to office Stewer")]]
(if: $incharge is "Peter Davey")[You immediately realise that asking for P&L protection was a mistake. Tom Pearce fumes at you, complaining that everyone is a mercenary in this organisation, that people only care about their individual bonuses, and so on. He calms down gradually, but it is clear - you have taken on this deal for better or worse (and, it appears, for a pretty miserly share of the commission).
The post-meeting quickly gets even more sour as an assistant knocks on the door, then brings you a note on a small yellow Post-it. You glance at your Blackberry and confirm the horrible truth. The Zendex is in free fall - something to do with a Chinese trade deal falling through, or some injudicious statement by the finance minister or something. The office is apparently going crazy and a load of clients want to speak to you.
Tom Pearce is visibly glad to be rid of you. His assistant volunteers to cancel all your other meetings, including one with Group Compliance, and to change your ticket.
(link:"Head quickly for the airport")[(goto: "back to office Davey")]]Tom Pearce swallows hard. There are plenty of rumours about this guy that he has killed people with his bare hands when he used to be in US Army special forces, and you can kind of see it now. But after a struggle with his emotions - it probably only lasts a second, but you definitely notice it - he composes himself.
He nods to the compliance representative in the meeting, and in the blink of an eye, he has rewritten history. "Good call, Mr Brewer. You know this business, it's the deals you turn down that matter, not the deals you take on. I'll smooth things over with Harry; he's going to be pretty cross with us, but he'll find someone else to take his deal. If he hasn't already asked everyone else on the street, I guess". That last sentence sounds like it might have a bit of a barb aimed at you, but you have more sense than to rise to it. The meeting breaks up.
You try to catch up with some old friends, but it appears that you have acquired some kind of social leprosy. Rumours spread fast in the New York Office, and your new status is apparently that of a guy with a below-budget office who just embarrassed Tom Pearce in front of his biggest client. It is going to be more important than ever before to turn that P&L round.
With time to kill, you have an amicable lunch with your ex-wife and get a check up from the company doctor. Not great news - his usual mild scolding about your lifestyle and diet is now being replaced by some quite ominously and in your view unnecessarily specific and graphic warnings.
You head to the airport for the plane back to Zenda in mixed spirits. Things can't get any worse (unless your doctor is correct), so they will either improve, or you will be fired. The die is cast, in any case, all that remains is to see out the story to its end. You see on the news sites while checking the internet in the lounge that the Zendex has been doing pretty badly, and there are rumours of a big unhedged trade out there. You take a last look at your Blackberry before boarding ...
(if: $GCstatus is "consulted")[(link: "There is an urgent message from Fay Widdicombe in Global Compliance")[(goto:"FWsaves")]]
(else:)[(link: "It has nothing but the usual run of dull daily emails")[(goto:"underbudgetlose")]]Just as your flight is moving from "Go to gate" to "Boarding", you see that you have seven missed voicemails from Fay Widdecombe. Instinct tells you that this might be worth missing a flight for. You dial her number, and sixty minutes later you are in a cab, back to her office.
It turns out that your call to Group Compliance earlier in the year asking for help with the compliance backlog set a number of alarm bells ringing, because there wasn't meant to be any compliance backlog. Your predecessor had assured Fay's team that everything was under control, and indeed they had been paying the salary of a (presumably fictitious) Head of Compliance for the Zenda office for the last six months.
The question of what exactly was going on is still the subject of an internal inquiry, but from what you can piece together by talking to Fay, it looks like Peter Davey and Jan Stewer are in it up to their eyeballs, and that there has been a considerable amount of unauthorised trading. You hope to avoid any searching questions about how it was that it took you so long to find out about this, but for the time being your own P&L has very much been forgotten; it looks like the entire Zenda office is going to be closed down.
This is unlikely to be a vintage year for your bonus, but you are still in a job, which is the best starting point to be looking for another job. You settle down to a desk in the suite of offices occupied by the internal inquiry, and start looking through your contact book ...
THE END The flight back home is miserable. You can't seem to face any food, and three or four glasses of wine on an empty stomach make it just as impossible to sleep. By the time you arrive to face the immigration hall in Zenda, you are feeling about as bad as you possibly could. Even the immigration guard seems to gulp as he looks at your face and your passport photo, and asks if you are feeling all right.
By the end of the day, though, you are looking back on that flight as one of the high points. The rumours of a large unhedged position in the Zendex futures market are true, and it appears that the guilty party is you. Peter Davey is nowhere to be seen, and Jan Stewer is full of excuses - apparently a big order from Greymare Capital came in a few hours after you caught the plane to New York and nobody seems to have been able to tell you. The Zendex is in free fall, and your unrealised losses are piling up day by day.
Then the straw arrives which breaks the camel's back. A report comes in from your local compliance team, and you can see the future in black and white before you. Jan Stewer has been hiding positions, and the true size of the loss is ...tens? Of millions? No, maybe that was how big it was a few days ago. By now, those positions will be in the hundreds. But someone else will have to sort this mess out, because you are seeing your vision swim, feeling a stabbing pain in your chest which radiates down your left arm, and you are falling, falling into the darkness.
THE END