A beginner's guide to the often unsavoury world of trading
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Despite the snappy title, it’s hard to imagine many buyers snatching Satyajit Das’s latest offering off the shelves in search of a thrilling read. Derivatives have a reputation for being dull and complex. But that’s only half-deserved, as Das shows.
Das opens with a surprisingly gripping account of a deal between a US bank and an Indonesian noodle-maker that robbed the Indonesians as effectively as if they’d been lured down a dark alley and clubbed with a blunt instrument. He covers a series of unnecessary trades, complex formulae guaranteed to come out in the bank’s favour and a currency collapse that doubled the noodle-maker’s debt, concluding “the dealers had played these guys for the suckers they were”.
This prologue sets the tone for the rest of the book. In contrast to straight trading memoirs, such as Liar’s Poker, this is more of a beginner’s guide, told through colourful anecdotes. For the most part, this works well and the text rarely drags. Das conveys the basics of derivatives in stories about delivering training classes to “clichéd frat boys’ clubs” of trainee traders and “punctual and pedantic” Chinese executives “who did not even understand the concept of interest”; uses the unfortunate Indonesians’ fleecing as a lesson in currency and debt swaps; and examines disasters, such as the collapse of hedge fund Long Term Capital Management (LTCM), to explore how risk can always catch you out, no matter how smart you may be.
The anecdotes are fictionalised, presumably to keep the libel lawyers happy, but are “based on what really happens”, says Das, who’s been swimming in these murky seas for 25 years. Certainly, they smack of truth, particularly once he explores the reasons why traders have every incentive to go off the rails. “Traders risk the bank’s capital: they literally bet the bank… If they win, they get a share of the winnings. If they lose, then the bank picks up the loss.”
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It’s interesting and unsavoury, but is knowledge of this arcane world much use to the layman? Das makes a convincing case that it is: everyone is “exposed to derivatives”, our savings are often lodged with banks or fund managers that trade them. Forewarned is forearmed: another LTCM could be just round the corner.
Traders Guns & Money is published by FT Prentice Hall and costs £20
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