A large amount of risk is more likely to result in large gains or losses than a small amount. I took a lot of risk.Alexis Stenfors
Chopping wood in the Swedish countryside was one way that former Merrill Lynch currency trader Alexis Stenfors unwound during breaks from working in the London markets.
This 'rogue trader', who grew up in Sweden, might not be as notorious as some of the others deemed to fall into this category. But he no doubt experienced similar levels of stress in the months and years leading up to the revelation that he had lost his bank $456 million.
Stenfors had an interest in banking and markets from an early age. As a young child he collected tiny sums of foreign currency and kept a record of his positions in a bank book. After graduating from the Stockholm School of Economics he began working in trading in the Swedish capital, and next moved on to London.
Here Stenfors started at Citibank, went on to Crédit Agricole, and then was offered a role at Merrill Lynch. It was, he says in his book Barometer of Fear, “love at first sight” for him and the top investment bank. He threw himself into his role, eventually trading up to seven types of derivative across five currencies.
Four years later he was exhausted by the extremes of the pre-financial crisis boom years. But he felt unable to resign thanks to the growing problems his bank was facing. “Merrill Lynch was bleeding money, but some of us were being pushed (or allowing ourselves to be pushed) even harder to make up for the disaster seemingly caused in other areas of the bank,” he writes. “Despite my best intentions, I told myself I couldn’t leave.”
This external and internal pressure led to Stenfors taking more risks when trading, and posting what he calls “optimistic” valuations of some of his trading positions. “I convinced myself that it was the right thing to do,” writes Stenfors, “and in doing so made a spectacular error of judgement.” Exacerbated by increasing uncertainty and volatility in the markets, these valuations were soon revealed to be very wrong.
Stenfors confessed his actions to his boss while on holiday in India. This led to an FSA investigation process and eventually a five-year trading ban for Stenfors, though he was not deemed to have acted dishonestly.
In his book, Stenfors states that his actions breached guidelines Merrill Lynch had set for him, and blames himself for the losses the bank sustained as a result. Merrill Lynch was, however, later fined €2.75 million by regulators in Ireland for not supervising Stenfors correctly.
Stenfors has chosen to try to make sense of his experiences in trading through completing a trading-related PhD and writing his book, which is part memoir and part guide to foreign exchange trading.
The book is brimming with financial knowledge and anecdotes about the trading world. These include notes on the technicalities of “Swedish T-bills” or “cross currency basis swaps”, and descriptions of the various “gentlemen’s agreements” that, he says, still exist in trading even though it can seem a very brutal industry.
In the book Stenfors is also candid about himself and his experiences during his career. He reveals, for instance, both details of conversations with his psychotherapist, and the fact that, as a joke, he used to book squash courts using the name of American Psycho antihero Patrick Bateman.
Stenfors is still pondering his 'rogue trading' actions and what caused them. “After a year of discussing morality with a lawyer, two years with a psychotherapist, and several more years talking about it with people I have met since, I am not sure I have come any closer to a definitive answer to the question ‘Why did you do it?’,” he writes in his book.
He does have a clear answer, however, to what drew him to trading in general. He tells TraderLife: “Trading is very much about predicting the future, which, of course, is impossible. Nonetheless, some things are more likely to happen than others and it is this balancing act in a constantly changing world that I found extremely fascinating."
“Something that really spurred me on was the challenge to ‘be right’”, he adds. Unfortunately, unlike getting wood chopped, this aim can be an ambiguous one.
Where do you draw the line between the morals of society and the morals of the market?Alexis Stenfors