LONDON (Reuters) - What happens in a market where you can no longer smell the fear or see the greed? Jerome Kerviel happens, say some seasoned stock market traders.
Stock markets have been a hazardous arena since at least the mid 17th century, but some say the junior trader blamed for a $7 billion loss at Societe Generale was a predictable accident, since a shift to electronic trading.
They say the anonymity of electronic markets, combined with the more cerebral skills needed to negotiate increasingly complex risks, are adding to the perils of a job risking multiple millions of dollars daily.
“If you are a computer hacker, and if you are computer literate with knowledge of the back office, the system is there to be broken,” said David Buik, a market commentator at Cantor Index in London, who set out as a trader 44 years ago.
Many dealers are skeptical that 31-year-old Kerviel, who has achieved notoriety on a scale eclipsing Barings trader Nick Leeson, is solely to blame. But they say he has served to highlight an advantage modern systems have lost: the animal factor.
“I love the PC and the rest of it, but get a life! It’s about people looking people in the face, seeing body language, seeing whether they’re lying to you, seeing if they’re being truthful,” said Buik. “I prefer to see the whites of their eyes. I want to see the fear, I want to see the joy.”
The global conversion to electronic trading — largely triggered by London’s ‘Big Bang’ financial deregulation in the 1980s — has cut costs and massively boosted the number of trades that can be executed.
The total value of shares traded worldwide in 2006 was $69.8 trillion, compared with $840 billion in 1980 — an increase of about 80 times over a quarter of a century, according to the World Federation of Exchanges.
The market in derivatives — not for the stock, but for the right to trade it — is even bigger. About 1.2 trillion stock index futures contracts were traded globally in 2006 — the total risk was worth about $73 trillion.
A rogue can potentially execute astronomical deals, silently, while abusing the anonymity and complexity of super-fast trading systems, which have opened the door to unscrupulous traders hiding losses in a labyrinth of data.
Traditionally in markets where very large sums of money are at stake, people have formed close-knit groups where trust is hard earned, but in the electronic era this is difficult.
“You never know who you’re dealing with,” said Les Ames, a trader at WH Ireland in London. “But (in the past), every day of every week on the market floor, you would have to face a person who you may have wronged, so the answer was you didn’t wrong them.”
Societe Generale said Kerviel set up fictitious trades that cancelled out the risk from his huge bets on European stockmarket futures, covering up his true exposure to market movements.
Other people of Kerviel’s age may share the same motivation — to make a fortune, achieve status, beat the system — as that which has driven traders for centuries. But after five years or so of generally steady global market growth, this younger generation comes with few memories of losing, and bankers say their skills are more technical than psychological.
“We moved away from your typical trader-type person ... to people who are more cerebral,” said Manoj Ladwa, a derivatives trader at TradIndex in London.
Banks now hire engineering and management graduates from top schools to their trading floors, impersonal places where rows of traders in boxes hunch at computer screens.
On a modern trading floor, the lighting and the voices are low. People — usually wearing grey — function in cubicles which are marked by uniform name tags, rather than photos of wife and family, plants or personal paraphernalia.
The inexperienced educated elite have replaced London’s sharp-eyed ‘spivs’ and ‘barrow-boys’ whose roots were in the street and whose deals were cut in person. A scientific, engineering or mathematics-related degree from a respected university is the global norm.
In years gone by, a booming voice, a larger-than-life personality, and — as one trader put it — “the ability to do your sums and a good line in cockney rhyming slang” were required.
One bank’s spokesman said new traders used to be given a large blue book and calculator on their first day, but if the trader was caught using his calculator in trading hours, a blue book would be thrown in the direction of his head.
As risks become more complex and computer systems are needed to monitor them, WH Ireland’s Les Ames said human oversight and discipline has faded.
He left the trading floors in 1971, but returned in 1986 to discover a revolutionized dealing scene as the London Stock Exchange had ended pit trading.
“If there was any contention at all, a jobber (market maker) would jump on the phone to the 23rd floor — the London Stock Exchange — and you were up there that day, there and then, answering why you did a specific trade,” he recalled.
Before the Big Bang, London trades were often done over long liquid lunches, ready to be executed the next day. Dirty Dick’s, the Hatchet and the Golden Fleece were some of traders’ favorite London pubs, which were typically packed with loud boisterous men, tobacco smoke lingering in the air, and with women and television strictly banned.
“It was all very much handshakes and everybody trusted everybody,” said Tony Craze, a stockbroker at Dawntraders.co.uk who has worked in the financial services sector since 1964. Deals were often scribbled down on pieces of paper during lunch.
Now it’s impossible to sense what is happening.
“You never really know what everyone’s doing, because people will still be trading quite actively, but they’re just not shouting across the trading room,” said Ladwa.
Editing by Sara Ledwith