one morning in october 1998 i sat down at my trading desk for the japanese bank i worked for in london. i was trading usdyen then with a decent size customer basel. a normal range of the day was 25 pips on a quiet day to a 100 pips on a busy day. overnight usdyen has sold off a few big figures from 134 to around 128/129 when i sat down. then the fun began. i looked at the order book and apart from a few decent size orders to buy the book was full of stops all the way down to 120. first customers get stopped out pretty quickly between 128 and 125. whats going on everyone starts asking? someone out of the far east selling is the response. im filling customers within 20 to 4o pips away from their stop level.not too bad i think. but they are all moaning about the fills. the day moves on. we hit the unpenetrable 120.00 level. it went through like nothing was there. im filling customers around 50 pips to 80 pips away now. no one seems to have a clue what is going on apart from the fact its going down. intervention rumours are flying around. the usual rumour about the fed wont let it carry on like this and they will come in to support the market does the rounds. the market occasionally spikes a couple of big figures and immediately is hit back down. we now hit the 115/116 area. its getting really messy now. im quoting a big figure wide and filling stops a big figure away. customers all want out. dont care where and how just get me out. we hit 112/113. intervention maybe but rumours abound and we trade up 6/7 big figures to below 120 in minutes. i cant remember where it finished up but it was around 123 ish i think. i remember this day for the obvious reasons and after was a lot wiser. when people want out they want out at any price. the tiger fund had the yen carry trade on then and they was one of the largest funds around at the time.always in the fx markets banging it about. they got done on that trade big time as the link explains in more detail. my point is this. the tiger fund had the yen carry trade on in size that does not even compare now to a small hedge fund and the devastation caused was unbelievable. if the funds and institutions have this trade on in a size that some offiicials dont know or cant even begin to calculate i think what happened last week is a drop in the ocean if this starts to get out of hand. just a little story from an old timer.hope it helps anyone who was not around then. http://www.rgemonitor.com/blog/roubini/176117
Great post. Nice to have some commentary from a foreign trading perspective, especially from prior to the 2000's.
My first thought is should a trader be allowed to see where those stop losses are hanging? > i looked at the order book and apart from a few decent size orders to buy the book was full of stops all the way down to 120. Part of my fear about leaving a stop somewhere ion a stock is it will be close enough for a market maker to press it down and fill just before some good news comes out. conspiratorial thinking I know but stranger things have happened. With currency trading maybe it's different. Next did you feel the need to use leverage? I get so mad when I here it's not enough to borrow at 0% or 1% and dump it into a 5% yield that one must use derivatives as well. I'm hoping risk management is in effect and indeed several houses and funds will have this trade paired in such a way that a true shakeout of disastrous proportions won't happen.
I think this is what Goldman Sachs is warning about int the story "GS warns of 'dead bodies' after market turmoil" that I have posted on my blog. (I am not spamming, simply discussing the current issues of the day). I believe some carry traders want out and will be liquidating all through March (especially Japanese banks that have to close books by March 31st I think). The volatility world wide in most assets including equity is going to give people some stomach churning pain, but long-term holders can probably ignore the waves. Short-term traders like myself think this is a godsend and better than the low volatility trading we had from especially November to february! http://lauristonletter.blogspot.com/