From American Affairs Journal, Volume VIII, Number 3, Fall 2024:
REVIEW ESSAY
The Trading Game: A Confession
by Gary Stevenson
Crown Currency, 2024, 332 pages
When the rich get richer, they do not spend more—or at least in the right way to stimulate the economy. And low interest rates after the financial crisis benefited the rich disproportionately, keeping the economy sluggish and backfiring as a policy measure. Those are the primary lessons from Gary Stevenson’s The Trading Game, an economics course for our time masquerading as an updated mixture of Liar’s Poker and Good Will Hunting.
Stevenson traded short-term foreign exchange swaps on a desk that was part of Citigroup’s larger fixed income trading operation in London and Tokyo from 2008 through 2014. Citi itself bought Travelers in 1998, a year after the latter had acquired the then premier bond house, Salomon Brothers. All of that adds to the irony that Stevenson’s economic education may have come in the same group that employed Michael Lewis a generation earlier.
If Western economies have endured more anemic growth in the decades following the immediate postwar period, memoirs about trading society’s debts have been a booming industry. The two phenomena may be related.
But Stevenson’s ascent to “the City,” the financial district of London, whose major buildings loom within sight of his childhood home in working-class Ilford on London’s eastern periphery, is an unusual one.
Uncommon math (“maths,” as the English say) skills catapult him to the London School of Economics despite being expelled from high school for selling £3 worth of cannabis in a misguided outlet for his early entrepreneurial spirit. But Stevenson rallies to ace his entrance exams, overcoming the setback and putting himself back on course.
Finally in a school that can deliver him from his impoverished upbringing by vaulting him into one of the buildings in whose shadows he lived as a child, he finds himself among the children of Russian oligarchs and Chinese Politburo members “sent to study simultaneous equations for a few years, before flying home to take over the running of the mother country, perhaps with a few years of working at Goldman Sachs or Deloitte in between.”
Undaunted, he sits in the front of each class determined to soak in as much as he can on his way to a high-paying City job. He returns from his successful first year, however, to find everyone skipping class, using acronyms related to the bond market (ABS, CDO, CDS, etc.), dressed in suits, and spending all their time attending networking events for which he’s socially ill-prepared. “Second year is internship year!” he finally learns from a fellow student from Slovenia.
Stevenson is unable to compete on extracurriculars and in personal polish with students who have been “prepping for this since they were about four. . . . [by having] trekked the Sahara, or led the Junior United Nations, or played the fucking oboe at the Royal Albert Hall.” But he plays up his grades and math skills, stumbling into, and winning, a card game (the trading game) requiring both statistical and psychological skill, including bluffing, that Citi’s bankers organize for students.
Even here there is an odd obstacle, however. The Citi traders, in the final round held at the bank’s offices, can see that Stevenson makes roughly the same mathematical calculations as the others, but bluffs his way to victory. So, in the final hand, they rig the game, dealing his opponents cards that they’d have an impossibly low probability of getting randomly.
Stevenson goes down in flames, but he sticks to his strategy, bluffing the whole way. And that’s exactly what the traders want to see. They confess what they’ve done, and promptly award him victory. With that, he secures the internship and then a job at Citi.
Efficient Markets
The work of his desk generally involves borrowing in a currency at a price where one might benefit from a fall in rates, and lending in one where one might benefit from a rise in rates.
That makes for two highlights in the six-year period Stevenson spends on the desk. The first was lending U.S. dollars for a month and buying them back on a daily basis during the financial crisis when the world was starved for dollars and a dislocation had occurred between the thirty-day and one-day rates.
There’s a risk in every trade, Stevenson reminds us. And the risk in that trade was that the global financial system would collapse. The bet—correct, of course—was that political authorities wouldn’t let it.
Stevenson is floored when his first $10 million in profits for the bank result in a bonus of £395,000. It feels like robbery to him, and although he stays long enough to make himself millions, he leaves a few years later, presumably before insanity and cirrhosis set in as with so many other traders.
Before he leaves, the second trade ensues, and this is the one that contains the important economic lesson. When the turbulence from the crisis calms, everyone expects interest rates to rise and the economy to recover. In fact, the trade on Stevenson’s desk every year from 2010 onward is for economic growth and rising rates, and it winds up being a loser.
Rates, of course, never rose during this period, and the economy never strengthened very much even with (or, as Stevenson argues, because of) the incessant application of monetary stimulus.
Stevenson’s background—and an encounter with the only non-university-educated trader in his group who tells him to throw his books away and look at the world around him—renders him primed to understand that nobody in Ilford and many other places is benefiting much from low rates.
Economists spend years memorizing “representative agent models.” But in viewing the economy as a representative person, Stevenson argues, the models fail to account for precisely how money is being distributed or who spends it.
Accordingly, Stevenson defies the whole desk, betting on the economy to stay sluggish because he knows middle-class and poor people are not only not spending, but are also losing the assets they have.
Stevenson even chooses to work closely with a young Italian trader named Fabrizio, who adheres to establishment monetary views. Fabrizio, or “Titzy,” as Stevenson calls him, is a graduate of Bocconi, “basically just LSE for Italians.” Titzy serves the important role of being “the voice of. . . .Wall Street. . . .[because he] always thinks the market [is] right.”
In response to Stevenson’s assertion that everyone’s broke, and that’s why the economy is stagnant, Titzy imitates him mockingly, “I don ava no fuckina money—Come on. . . . It’s a monetary system. It’s not possible for no one to have any money. The whole thing has got to add up.”
And, at bottom, Stevenson accepts this standard monetary view. But he looks around at the millionaires on the trading desk and realizes that they, and other rich people who can borrow and buy assets, are the beneficiaries of low interest rates. “We were the balance,” he says.
In other words, it’s true that money is being made available with low interest rates—but only to those rich enough to borrow. And as long as rates were suppressed, “inequality. . . would grow and grow until it dominated and killed the economy that contained it. It wasn’t temporary, it was terminal.”
Stevenson finds himself running the euro desk after the ECB offers unlimited loans to banks at 1 percent. And as Stevenson says, “if you don’t control the quantity, then you don’t control the price.” The result was that there was no way of knowing exactly what the interest rate would be on any given day, but it would likely be pinned at low levels.
But with Titzy’s help staying on top of every daily move, Stevenson is able to ride the roller-coaster and become Citi’s most profitable trader....
....MUCH MORE
This article published online, August 20, 2024.
