The New Market Wizards: Conversations with America's Top Traders (3 page)

Did the job working on the equity options desk prove valuable in terms of learning how to trade options?

The job was certainly helpful in terms of overall trading experience, but you have to understand that, at the time, equity options trading at Salomon was highly nonquantitative. In fact, when I think back on it now, it seems almost amazing, but I don’t believe anybody there even knew what the Black-Scholes model was [the standard option pricing model]. Sidney would come in on Monday morning and say, “I went to buy a car this weekend and the Chevrolet showroom was packed. Let’s buy GM calls.” That type of stuff.

I remember one trader pulling me aside one day and saying, “Look, I don’t know what Sidney is teaching you, but let me tell you everything you need to know about options. You like ’em, you buy calls. You don’t like ’em, you buy puts.”

In other words, they were basically trading options as a leveraged outright position.

That’s exactly right. But that whole trading approach actually fit very well with my own tape-reading type of experience.

Did you return to the equity options department when you finished Cornell?

I worked there at the beginning of the summer, but then I went into the Salomon training program, which is something that every new hire does. The great thing about the Salomon training course is that you get exposed to all the key people in the firm. All the big names at Salomon came in, told their story, and in essence delivered their persona. You were indoctrinated into Salomon Brothers, and the culture was passed on. Having spent my entire career at Salomon, I feel very strongly that it was important for the culture to be passed on.

In the late 1980s, a lot of that culture was lost. The programs got too large. When I started at Salomon, there was one program of 120 people each year; by the late 1980s, there were two programs with 250 people apiece. The trainees also seemed to come from more of the same mold, whereas in the early 1980s there appeared to be a greater willingness to hire a few wild-card candidates.

What did you get out of the Salomon training course besides being indoctrinated into the culture?

That was what I got out of it.

It doesn’t sound like very much. Was there more to it?

No, that was a tremendous amount. Clearly you have never worked for Salomon. The company is all about the culture of Salomon Brothers.

OK, tell me about the culture of Salomon Brothers.

Salomon Brothers was a firm that was almost solely involved in proprietary trading and for years was run by a handful of very strong, charismatic individuals. They were street fighters who were betting their own money and who really understood what it meant to take risk. It was all about personalities, guts, insight, and honesty and integrity beyond any shadow of a doubt.
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Salomon was an institution. There was virtually no turnover of key personnel at the firm. The chairman, John Gutfreund, had a desk on the trading floor that he sat at every day. In my nine years at Salomon, I never sat more than twenty feet away from him.

I remember my first conversation with John Gutfreund. I had been with the firm as a full-time employee for less than a year. You have to picture the scene. It was the early evening of July 3. The Salomon trading floor is a huge, two-story space—at one time it was the largest trading floor in the world. The twilight colors of the fading sunlight were flooding through the huge glass windows. Because of the approaching holiday, the entire floor was completely abandoned except for John Gutfreund and myself.

I heard him call, “Bill, Bill.” I had no idea why he would even know my name, but that was the kind of place Salomon was. I was wrapped up in what I was doing, and I suddenly realized that he was calling me. I walked over to his desk and said, “Yes, Sir.”

He looked at me and asked, “Where did the franc close?”

Racing through my mind are all the possible reasons he might be asking me this question in this very scripted scenario. I looked at him and asked, “Which one, Swiss franc or French franc?”

John Gutfreund is a man who exudes power. He is very charismatic and you can almost feel the aura around him. He didn’t hesitate, and looked straight at me and said, “Both.” So I gave him both quotes in a voice that was probably one octave higher than normal.

A little over a year later on another summer day, the same scene is virtually repeated. The light of the setting sun is streaming into the trading room, and John Gutfreund and I are nearly the only two people left. Again, I hear a voice behind me, “Bill, Bill.”

I am struck by the déjà vu quality of the moment. I walk over and say, “Yes, Sir.”

“Where did the franc close?” he asks.

“Which one?” I ask. “The Swiss or the French?”

Without missing a beat, and without showing any trace of a smile, he looks straight at me and says, “Belgian.”

Here’s a guy who is chairman of Salomon Brothers, which in those years was probably the most powerful firm on the street, while I am a nobody trainee. It has been a year since that first encounter, and he has the presence of mind and the interest to set me up like that. As the years went by, and I got to know him better through more contact, I realized that he was fully aware of the impact that conversation would have on me. Here we are talking about it nearly ten years later, and I remember every word of that conversation. He had that effect on people. He would very often have conversations with trainees and support people.

Was Gutfreund a trader himself?

John came up through the ranks as a trader. When he was chairman, he spent his day on the trading floor to see what was going on. We always said that John could smell death at a hundred paces. He didn’t need to know what your position was to know what your position was, or how it was going. He could tell the state of your equity by the amount of anxiety he saw in your face.

Salomon Brothers was a culture like no other. People often spoke of Salomon’s appetite for risk. It wasn’t that the company was a risk-seeking firm, but it was certainly a firm that was comfortable with risk or with losing money, as long as the trade idea made sense.

How was it that you ended up in currencies after the training session was over as opposed to going back to equities?

Actually, I wanted to go back to equities, but one of the senior people in the department took me aside and said, “You’re much too quantitative. You don’t need to be down here in equities.” He talked me into going into this new department that was being formed: foreign exchange. I was one of the more highly thought-of trainees, and at the end of the session, I was recruited by several departments, including the currency department, which was just being formed.

How did you choose the currency department?

I wanted a trading position, and I got along well with the people. However, I had a lot less choice than I might have been led to believe at the time.

What do you mean?

You get recruited, do your lobbying, and pick your choices, but by the end of the day, the powers that be get to move the chess pieces and decide where they want you placed.

Did you know anything about currencies at the time?

I didn’t even know what a Deutsche mark was. But, then again, no one in the department really knew much about currencies.

No one?

Not really. There was one junior person on the desk who had previously worked for a bank.

Wasn’t there anybody else in the firm with expertise in currencies?

No.

Why wasn’t there any thought given to getting someone from the outside with experience to develop the department?

That’s not how Salomon did things. At Salomon everything was homegrown. You’re asking questions like you think there was some sort of written business plan. The reality was that a few senior people got together one day, and one said, “Hey, shouldn’t we really start a foreign exchange department?”

“Okay. Who can we get to run it?”

“How about Gil?”

“Okay. Hey, Gil. Do you want to run the department?”

“Sure, I’ll do it.”

Gil came from bond arbitrage. He had no experience in currencies. His idea was to get a bunch of bright people together, figure out how this foreign exchange stuff worked, let them trade the product around, and see if they could make some money.

With no one in the department having any real background in currencies, how did you get the experience to know what to do?

One of the fellows in the department was very extroverted. He had us going out to dinner with international bankers three or four times a week. In those days, I was particularly shy. In fact, I remember one day one of the traders on the desk asked me to call Morgan Guaranty to place a D-mark transaction. I protested, saying, “But I don’t know anyone there.”

He said, “What do you mean you don’t know anybody? Just pick up the Hambros [a book that lists all the international foreign exchange dealers], flip through, find Morgan’s D-mark dealer, and call him.”

I must have sat there agonizing for over ten minutes, trying to figure out how I could call somebody I didn’t know.

Tell me about your early trading experiences in currencies.

At around the same time that the Salomon Brothers foreign exchange department was formed, the Philadelphia Stock Exchange introduced a currency option contract. I was the only one at the desk who even knew what a put or call was. Also, the product was being traded on a stock exchange with a specialist system, and I was the only one on the desk with any background in equities. Everyone else in the department came from fixed-incomeland, which is the forty-second floor. Equityland is on the forty-first, where I came from. I don’t think anybody else in the department had ever even been on the forty-first. I also knew specialists and market makers on the Philadelphia Stock Exchange floor. No one else in the department even knew what a specialist was. [In a specialist system, a single individual matches buy and sell orders for a security, as opposed to an open outcry system, in which orders are executed by brokers shouting their bids and offers in a trading ring.] The situation was tailor-made for me. Gil said, “You’re the only one in the department who knows anything about this, so just do it.”

The key point I am trying to make is that Salomon’s foreign exchange department, Bill Lipschutz as foreign exchange trader, and currency options all started at the same time, and we grew together. It was a unique, synergistic type of experience.

How did you become successful as a currency trader without any previous experience?

Foreign exchange is all about relationships. Your ability to find good liquidity, your ability to be plugged into the information flow—it all depends on relationships. If you call up a bank and say, “I need a price on ten dollar [$10 million] mark,” they don’t have to do anything. They can tell you, “The mark dealer is in the bathroom; call back later.” If I call up at 5
P.M
. and say, “Hey, Joe, it’s Bill, and I need a price on the mark,” the response is going to be entirely different: “I was just on my way out the door, but for you I’ll see what I can do.”

As someone brand new in the business, how did you develop these contacts?

One thing that helped me a great deal was that I had a background in options when it was new to the marketplace. “He knows options,” they would say. Hell, I didn’t know
that
much about it, but the point was that no one in foreign exchange knew very much about it either. Their perception was: “He can derive the Black-Scholes model; he must be a genius.” A lot of senior guys in the currency market wanted to meet me simply because their customers wanted to do options, and they needed to get up to speed on the subject quickly.

Also, I worked for Salomon Brothers, which at that time provided an element of mystique: “We don’t know what they do, but they make a lot of money.”

Another factor in my favor was that, although I worked for an investment bank, I tried not to act like a pompous investment banker. The typical guys in investment banks who were doing foreign exchange back then were fixed-income types. They were prissy in the eyes of the FX [foreign exchange] guys. They wore suspenders and Hermès ties; they were white-wine-and-arugula-salad type of guys. They were not the go-out-for-pasta-and-dribble-marinara-sauce-all-over-yourself type of guys, which is what the foreign exchange traders basically were. I was really different; my background was different.