(Bloomberg Businessweek) -- You can tell a lot about a country by watching its money. Currency remains a barometer for a nation’s prospects. A strong dollar, for example, is a sign of economic power. Stability is also prized, a sign of steady, predictable growth. Only a handful of countries can claim both. Britain used to be among them.
Since suffering a historic fall in value in the days after the U.K.’s 2016 vote to leave the European Union, the pound has become one of the world’s most volatile currencies, less stable than the Russian ruble or the Mexican peso. It’s down about 13% since the referendum, pushing up the cost of energy and imported goods, weighing on real estate, eroding the value of savings, and paralyzing investors.
Volatility isn’t bad for everyone, though. For traders who make their living in foreign exchange (FX) markets, it means opportunity. The biggest players in currency markets are central banks and large companies that require cash for their global operations—a British manufacturer opening a plant in Malaysia, for example, will need ringgits. Speculators are a different breed. They include investment bank traders, hedge funds, and retail traders. Their game is essentially to place bets on whether a currency’s value will go up or down over the course of a week, or a day, or an hour. At the simplest level, a trade is exchanging dollars or yen or whatever to another currency; other trades can involve arcane alternatives. It’s these decisions, this multitude of speculator trades, that drive the market’s daily oscillations in currency values. Colleagues in more august areas of banking often characterize them as gamblers. “I am aware that, of the thousands who try, some are quite successful,” Alan Greenspan, former chairman of the U.S. Federal Reserve, said in 2004. “So are winners of coin-tossing contests.”
It's not an easy life, currency trading. Which is why most days, Ed Matts jolts himself awake by standing naked in his garden and pouring a bucket of frigid water over his head. Matts is a 53-year-old trader who works from a six-bedroom stone house in Sherborne, a bucolic town in South West England that boasts two castles. For years, he worked at Citigroup and other banks, routinely trading tens of millions of dollars (U.S. dollars being the standard measure of currency trading) at a time. As a banker, he used to get daily phone calls asking for his views on the direction of the Japanese yen, for example. Figuring he might as well start charging for his advice and using the money to trade for himself, he quit in the early ’90s and started his own business. Eventually, he founded Matrix Trade, which has hundreds of clients.
Currency traders have long kept their rituals secret—unlike those who deal in shares and other financial instruments, most have no obligation to report their positions. And, aware that speculators are often blamed for causing or exacerbating foreign exchange crises, they prefer to celebrate their triumphs and mourn their losses away from public scrutiny. But Matts and a friend of his, Gaurav “Steve” Mehra, who trades in Geneva for wealthy investors, agreed to allow Bloomberg Businessweek to watch them work during key moments in Britain’s move to exit the EU. For most people, Brexit was a slow-motion car wreck, too complicated to parse. Matts and Mehra’s livelihood depended not only on understanding what was happening, but on predicting the future, too.
March 12, 2019: Deal or No Deal?
At 6 a.m., Matts rolled over in bed and reached for his phone. Sterling, as the pound is also known, had jumped 1% overnight. He stumbled downstairs. Some questionable seafood had left him feeling too fragile for his daily cold-water wake-up, so he settled for black coffee and a cigarette. “Never trade sick,” he said, looking gray. “I always do, anyway.”
Prime Minister Theresa May was scheduled to put her compromise exit deal to U.K. lawmakers that evening, before a March 29 deadline to leave the EU. The Daily Mail was calling it “the most fateful vote in their history.” If it passed, Britain would leave the trading bloc within a defined structure, albeit one that both pro- and anti-Europe forces saw as a fudge. If the proposal failed, the country risked crashing out with no deal, likely bringing food shortages, an economic crisis, and chaos at Britain’s borders.
Matts had recently separated from his wife and was living alone in their house. As the country beyond buzzed with news about the vote, he took his place in front of a bank of computer screens in the living room and watched the pound tick higher.
He struck up a chat with Mehra, who was preparing for the Brexit vote in his discreet office a short walk from Lake Geneva. Mehra trades currencies for rich families, at a company called MSM Investment Advisors. A stocky, Indian-born cricket enthusiast with a shaved head, Mehra was accompanied by his miniature schnauzer, Mario (as in Draghi, the departing European Central Bank president). Mario bounced around the office as Mehra’s computer screens flashed green and red. MSM manages about $1 billion in all, making it roughly the size of a small hedge fund, and Mehra doesn’t get paid unless his trades make money.
He and Matts were both long on the pound, meaning they were betting it would strengthen following the vote. The market, it seemed, was watching for signs that the Brexit crisis might be resolved. A close vote, even an unsuccessful one, would suggest an end was in sight. If Matts and Mehra were right, the payoff could be tens of thousands of dollars, maybe more. If they were wrong, they’d lose just as much. “It’s my life,” Matts said. “It’s trading.”
At 11 a.m., an unexpected event caused the pound to wobble. The U.K. attorney general warned lawmakers on live television that there were legal risks in May’s compromise, particularly on the thorny question of the border between Northern Ireland and Ireland, an EU member. It was a blow to the deal’s chances, and sterling fell 1% in minutes.
Sensing an opportunity to add to his position at a relative bargain, Mehra called his broker at Citigroup in New York. He paused briefly, phone receiver at his ear, as the line on his screen dipped lower, then gave the order, doubling down on his bet. Currency trading involves buying one currency and selling another, so traders must assess the relative economic outlook of two countries. One of the most popular pairs is British pound-U.S. dollar, known as “cable,” after the transatlantic telegram system that once ran between trading floors in New York in London.
“Cable is a beast,” Matts said. “It’s erratic.” He’d pounced on the attorney general’s warning, too, sending an order by email to his team at Matrix. Matts trades with both his clients’ money and his own; he also writes an online newsletter with tips for paying subscribers, earning a six-figure annual sum for his work. (He declined to specify the amount.) On paper, Matts had about £2.4 million ($3.1 million) trading in the market, but in reality he hadn’t invested anything beyond the fee paid to his broker to place his bets. He’d win or lose based on the change in price, a few percentage points of the trade’s value. It’s standard practice to manage risk on trades by setting lower and upper limits (stop-loss and take-profit orders, respectively) at which the investment is automatically cashed out.
One of the competitive advantages Matts claims is his firsthand experience of both finance and politics. After a career as a trader at First Chicago Bank and Citigroup, he tried unsuccessfully to become a Conservative member of Parliament, campaigning alongside future prime ministers David Cameron and Boris Johnson. Matts even appears in a 2001 book by Johnson, then a freshman MP. Johnson describes going door-to-door with a hyperconfident young Tory who, when rebuffed by female voters, would ask, “Fancy a snog then?” The anecdote was mostly true, Matts recalled, except “I said, ‘shag.’ ” His political career ended in a low-key scandal in 2005, when one of his campaign photographs was doctored to show an anti-immigration message. (His explanation is that one of his team altered the photo and he agreed to take the fall.) He went on to lose to the Labour Party candidate and is no longer in contact with senior members of the Conservative Party.
The results of the vote on May’s compromise deal came in a little after 7 p.m. As expected, the bill was defeated, 391 to 242. In Geneva, one of Mehra’s screens showed the profit and loss for all his trades in real time. “Look,” he said, pointing at the monitor. “Look at it go. See sterling going higher.” His boss called up and joked that the U.K. was becoming a banana republic. “He told me I should go home, as we’re making a lot of money,” Mehra said. “There we go, that’s 10k for me.” Sterling began to taper off after shooting up by almost 1%. The brief surge of optimism after the vote had faded, and the pound returned to where it had been.
Back in England, Labour Party leader Jeremy Corbyn was on television talking about the need for unity. “We must come together to stop no-deal,” he said. In response, Matts, cigarette dangling from his mouth, shouted to his virtual assistant in the kitchen, “OK, Google, play Come Together by the Beatles!” “Tomorrow, I will buy on the open,” he said.
The next day, in the aftermath of May’s failure, British MPs voted again, this time resolving to reject any attempt at a no-deal Brexit. The pound soared, and Matts cashed out around 8:30 p.m., making about £45,000 for two days’ work. Mehra, out with friends, noticed the climb and stepped out of the bar to close his positions, up $131,400.
March 29: Deal or No Deal, Redux
Currency trading has always occupied a peculiar place in finance. “We were on the corner of the trading floor, a ragtag bunch of weirdos,” recalls Helen Thomas, who traded at Merrill Lynch in London early in her career and now runs an FX consulting firm called Blonde Money. “It does suck in addicts. You ride these waves of joy and disaster.”
In recent years, the field has been further marginalized by scandal. Starting in 2013, traders at practically all the major banks were caught cheating, including using their advance knowledge of big client orders to trade ahead of them. In a fairly typical example, HSBC’s former global head of foreign exchange, Mark Johnson, was convicted in 2017 of front-running a $3.5 billion client order. A crackdown followed the revelations, with criminal prosecutions, fines, and scores of job losses. The biggest banks and hedge funds have also developed automated trading systems that now carry out more than half of all FX trades, according to a recent survey. “The human trader is dying out,” Thomas says.
Those who remain face a more restrictive environment, in which it’s harder to get an edge. As many as four-fifths of speculators lose money overall, by some estimates. Still, the allure of the self-made, self-taught millionaire remains. FX trading conferences are full of companies with names such as Zero to a Million Club, which offer to sell the secrets of the trade to bored office workers who dream of earning a living in the world’s largest, most exciting market.
For the two weeks after May’s deal was voted down, her government limped from one crisis to another, as lawmakers rejected every available alternative. At the end of March, the EU agreed to extend the Brexit deadline so May could try one last time to get her proposal, slightly amended, through Parliament.
It all meant more opportunity to trade. At lunchtime in Geneva, Mehra was in a relaxed mood, dressed in jeans, a Ralph Lauren shirt, and a neck scarf. Speaking perfect French, he ordered sushi at a restaurant near his office. “I think May is going to make it,” he said. “The pound is going to really take off when she does.” When he returned to the office, his television showed news footage of anti-Brexit protests outside Parliament. “Don’t these people have jobs?” he said.
Mehra came to his calling in his 30s, after trying his hand as a cricketer, an accountant, and an executive at a biodiesel company. A chance encounter on the golf course with his current boss led to a tryout, and then a job, at MSM. Now 49, Mehra, like Matts, bets on share indexes, commodities, anything that moves. He gets a 20% performance fee on top of a small salary. Brexit hasn’t always been kind to his FX trades. He lost about $600,000 the night of the 2016 referendum, when the pound recorded one of the largest declines by a major currency. Mehra is a conviction trader, reading widely, including news reports and investment bank analysis, then taking a view on how markets are going to move. He tends to hold his positions for days and weeks, rather than hours.
An hour before the second vote on the prime minister’s deal, Mehra sent a single-word message to Matts: “f---.” He’d just read analysis by Thomas, predicting May’s latest vote would lose, too. Matts had much more money staked on sterling getting a boost, about £6 million on paper, than he’d had on March 12. “I’m not going to change my view at all,” he told Mehra.
Matts is a chartist, spending hours staring at graphs in his living room, like Captain Ahab poring over nautical logbooks in his cabin. The charts show historic markets Matts thinks offer clues about the future. In explaining his methods, he might invoke “cobweb theorem” or overlay the sterling’s movements with those of the New Zealand dollar, pointing excitedly and asking, “What do you see?”
As MPs started to vote, the pound wavered. “Goodbye, money,” Matts said. He’d added to his position by spending about £20,000 on a call option, which gave him the right to buy sterling at $1.315 if it climbed to that level. If it didn’t, it would expire and Matts would lose the £20,000. “I might not be nervous, but my digestive system is,” he said. He went to the kitchen for a bicarbonate of soda.
The vote was announced at 2:30 p.m. Another resounding defeat for May. The pound fell 0.5% in a minute. “The legal default now is that the United Kingdom is due to leave the European Union on the 12th of April,” May told MPs after the vote. It wouldn’t be enough time to agree to a new deal. Mehra watched quietly as markets reacted to the bad news. During a brief spike, he pointed at the screen. “Come on, cable! Come on!” But the move was temporary. Mehra was down about $65,000 on paper. He held on to the position and later closed it at a profit.
Matts couldn’t decide whether to exit his position at a loss or hold out for a rally. In the end he did nothing and left to attend a concert with his Belarusian girlfriend. His trades were live, and he was facing a paper loss of around £20,000—more, if the option trade didn’t work out. He’d monitor the markets from his phone.
The next day, sterling recovered as British politicians debated alternatives to May’s deal, including a limited Brexit that would keep the U.K. in the EU’s customs union for trade purposes. In mid-April, the EU granted the U.K. another deadline extension, to Oct. 31. May tearfully announced her resignation six weeks later.
Sept. 4: Deal or No Deal, Redux, Again
As the months wore on, the pound became ever more volatile. The ruling Conservative Party chose Matts’s old campaigning partner Johnson to run the show. The new prime minister pledged to take the U.K. out of the EU with or without a deal come Halloween.
The first test of his leadership came on Sept. 3, when MPs voted on whether to seize the parliamentary agenda from the government, thereby giving the House more power to stop a no-deal Brexit and undermining Johnson’s authority. Twenty-one Conservative MPs defied him and backed the bill. He fired them all from the party.
“I think Boris Johnson could be an amazing leader,” Matts said the next day. “Another Margaret Thatcher.” He looked thinner than before, explaining that his girlfriend had encouraged him to become a vegetarian. There was an abdominal exercise roller on the floor of his living room. That evening, parliamentarians were putting forward a new bill that would make it illegal to leave on Oct. 31 without a deal. Matts said he thought a no-deal Brexit could be “really cool” if the U.K. emulated Singapore with a low-tax, low-regulation economy.
Johnson had previously shown little interest in the exchange rate. “The pound goes up and goes down,” he once said. In normal times, that analysis is supportable—when a currency goes down, a country also benefits from a rise in exports fueled by cheaper goods. But the surrounding uncertainty of Brexit meant the export picture wasn’t improving much, because businesses were unable to plan for the future. Johnson was under pressure from FX as a result.
In the buildup to the Sept. 4 vote, Matts was, once again, a buyer. “Cable is undervalued. The U.K. is undervalued,” he said. He bought another call option and took positions in the DAX, Germany’s stock market index, which he thought would move in response to the events in Westminster. “If the vote fails, it’s bad,” he said, summing up his trades. How bad? “Jump-off-a-cliff bad,” he said, laughing. An unexpected drop in the pound might cost him £100,000, he estimated. A few hours later, right before the vote, Matts decided to hedge his bets, placing a small order to sell the pound in case it fell immediately after the results came in. But overall, he remained heavily invested in sterling having a good day. “Nothing has changed,” he said, returning to a phrase he’d used many times over the months.
The vote that evening passed by a narrow margin, meaning Johnson would risk breaking the law if he tried to force a no-deal Brexit. In response, he moved that a general election be called “to sort this out”—on Oct. 15, very close to the Halloween deadline. Cable, which had barely moved when the vote passed, started to creep down. “Shit!” Matts exclaimed.
He headed out for dinner at a small restaurant, sending the wine back to be decanted. “It tastes closed,” he told the waiter. Later his phone buzzed with an alert that Johnson’s motion had been defeated. Although his instinct about the pound’s immediate reaction proved correct, sterling moved against him the next day, wiping out the short trade and his option. “It’s part of what I do,” he said of the loss. In any case, he made his money back on the DAX. All told, he said, he was up 7.6% trading currencies on the year. It wasn’t as much as he’d made trading indices, but it was more than double the hedge fund industry’s average performance of 3%.
As always seems to be the case with Brexit, another deadline looms. On Oct. 28, the EU approved further extension, to Jan. 31. If the U.K. leaves without a deal, the pound could sink to parity with the dollar, an unprecedented low. And it might not bounce back. Asked why he continued to trade, despite the uncertainty and risk, Matts recalled asking a counterpart in the Bahamas the same question. “What else would I do?” the friend replied. Matts took the same view.
Mehra, by contrast, had had enough of the volatility and was watching the crisis from the sidelines. At the time of the September vote, he hadn’t traded the pound in weeks. “I’m not comfy buying sterling at these levels. It’s gone lower than I thought it would,” he said. His long-term girlfriend had just started a business, selling high-end pet products such as the jacket Mario wore, and Mehra was happy to be up about 10% for the year. He was in the outdoor area of a bar near the Rhône River, drinking vodka and soda from a glass the size of a goldfish bowl. “I need it in this job,” he said. “It’s just gambling with the pound at these levels, not trading, because nobody knows what’s coming next.” He’d begun buying gold instead. Read more: U.K. to Destroy Commemorative 50p Coins in Brexit Meltdown
To contact the authors of this story: Kit Chellel in London at cchellel@bloomberg.netGavin Finch in London at gfinch@bloomberg.net
To contact the editor responsible for this story: Jeremy Keehn at jkeehn3@bloomberg.net, Jim Aley
©2019 Bloomberg L.P.
