Extract: The Trading Game by Gary Stevenson

An FX swap is a loan. It’s a two-way loan where both people borrow one currency from one another. They both pay interest, which means, in the end, only one person pays the interest differential. If pounds are 3% and dollars are 2%, then the pound borrower pays the difference, which would be 1%.

But who sets the interest rates on the individual currencies?

So there’s a real fancy old building somewhere in your capital city, or in Frankfurt if you’re European, and that building’s called the ‘Central Bank’. It will probably be called the Bank of England or the Bank of Japan – basically the bank of wherever you’re from. In the US it’s called the Federal Reserve or Fed. In Europe, it’s the European Central Bank (ECB). In that fancy building a bunch of posh mummy’s boys who never left university try every year, and desperately fail, to prevent your economy from slowly collapsing. Then, they go and have a fancy dinner in a wood-panelled hall. These guys are important to your life, even if you don’t know it, and they are important in this story too.

At this point, though, the only thing you need to know about these guys is that they set the interest rates for every country in the world, including yours. (Another related fact, that you don’t need to know, but might find interesting, is that Bill had his own designated taxi driver, who would drive him home after broker dinners to his Hertfordshire manor whenever he missed the last train. One time I had a drink with that driver – his name was Sid – and he told me that whenever Bill was extra drunk, as a point of principle, he would make Sid stop off outside the Bank of England, so that he could sneak into an alley round the side of it and take a piss on the back of the Bank. Sid said that Bill would insist on that, even if it was not at all on the route home. I respected that a lot.)

So at this time in history, late 2008, central banks all over the world were rapidly slashing the interest rates to zero, in the desperate and ultimately futile hope that it would somehow stimulate their economies. This was happening to almost every currency on the desk: pound, euro, Swiss franc, Swedish krona and Danish krone, and the American and Canadian dollars. Once you add in the Japanese yen, which had already had zero interest rates for nearly twenty years, almost all of the major currencies would soon be at zero.

So what does that mean for FX swaps? Well, if the payment on an FX swap is equal to the interest rate differential, and almost all interest rates are going to zero, then the interest rate differentials must all also be zero, as well, right? And then all the FX swaps should be free!

But as Spengler had pointed out to me, the FX swaps weren’t all free. The very, very short-term FX swaps, the one-day ones, were free: the price was effectively zero. But for anything longer than a couple of weeks or a month there was a really huge premium for borrowing US Dollars. This created an equally huge opportunity for FX swap traders to lend dollars for three months at a time, and then just borrow them back every day. It was, as Spengler explained to me, free money.

Except, nothing’s ever really free money. Is it? Could it really be that easy to make cash? If it was that easy, why wasn’t everyone doing it? Well, the truth is that everyone was doing it. But was it really free? What were the risks?

These are all the questions that I could have asked myself that day, as I sat there, behind Spengler, and he was swinging his massive spreadsheet around. But I didn’t ask any of them. I nodded, and I said, ‘Yeah man, for sure, I want some.’

And Spengler just pressed the button and he spoke to Granty and he put the trade on for me, and just like that I’d lent two hundred and forty million dollars, for three months, in a dollar/Stokkie FX swap with Danske Bank Copenhagen, and I went home that day thoroughly happy, and it was the first medium-sized trade of my life.

It wasn’t until I got home, and I was eating dinner with my parents, and watching a little tiny fuzzy black-and-white television that you used to change channel on with a dial, that I thought to myself: ‘Wait a minute, what the fuck am I doing? I don’t know anything about dollar/Stokkie foreign exchange swaps. I’ve never been to Sweden in my life. And what the fuck do I know that Danske Bank Copenhagen doesn’t know? And isn’t two hundred and forty million dollars like, kind of a lot?’

The truth is that two hundred and forty million dollars, the size of trade suggested by Spengler, was not really a big trade to the STIRT desk, who frequently traded in billions and referred to them as ‘yards’. But it was a hell of a lot of money to me, and talking about a trade really feels very different to actually having a trade. I didn’t sleep much that night.

The next day I went in super early. I had to talk to Bill.

I was actually waiting for Billy when he got in that morning, and that surprised him. All the questions that I should have asked the previous day had at last crystallized in my mind. Putting your own money, and your reputation, and your career on the line, on what is basically just an opinion, will make you think long and hard about whether those opinions are actually right. Think about that when you’re watching the news.

The Trading Game is out now.