The markets can be a bewildering place. Photo by vlastula via Flickr.

Previously the preserve of bores and American Psycho-esque Wall Street stereotypes, the world of finance has found itself firmly in the spotlight in recent years. A continuing tragic-comedy of errors has been unveiled to the world in the wake of the financial crisis. An amnesiac tendency to leverage investment branches with commercial capital, feckless lending policies, billion dollar rogue trades, fiddling interest rates: the finance sector’s list of catastrophic incompetencies and moral ineptitudes goes on – and all the while slapping themselves on the back with multi-million pound bonuses. Now people take to the streets waving banners daubed with ‘Hang the Bankers’, united in their revulsion at a sector allowed to do as it pleased. And at the centre of this rogue’s gallery of villainous misanthropes, we find Satan in Armani. The stock market trader. Scalping the FTSE in the morning, lunch at the Ritz, short selling some beleaguered company out of existence in the afternoon, then gorging on vintage champagne and lines of Colombian purest in the evening. And probably murdering some puppies along the way.

Well, this is certainly the picture we’ve become used to seeing. But how much of this is stereotype and how much is an accurate depiction of an industry that is, in some way, morally reprehensible? The Globalist wants to find out. Over a series of three articles, we try and get inside the psychology of the trader: is the stock market as mysterious as most think it is? What’s going on now? And finally, how should we feel about the stock market? Are the caricatures warranted, or a timely prop to draw some of the heat away from equally culpable politicians?Rather than pursuing Goldmann Sachs’ top trader (probably busy killing puppies), I sat down with a professional trader who operates outside the social sphere of the trading floor. Having previously worked in the banking sector in a non-trading capacity, Mark began his own investment company in 2010. At first a one-man operation based in his study at home, the company now has its own office and a small team of traders trained by Mark. When asked how he got into trading, he smiles and describes a lifelong passion: lying on the floor reading the Financial Times as a child, fascinated by the idea of purchasing an inanimate object and watching it gain or lose value without doing much. Later came forays into personal investment, making twenty or so modest buys over a few years and watching them all eventually turn a profit.

This all culminated with a tip from a friend, encouraging him to buy the FTSE 100 should it drop below 4000 points. He did so, and within six months the index had rallied to 5600, delivering a profit greater than Mark had earned in the entire year previous. Off the back of this success, he began to trade using a basic, telephone dealing service.

When I remark that this sounds rather non-technical, even a bit like punting, he smiles again.

“Well, it didn’t feel like punting,” he said. ”I’ve had experiences with what I’d call punting subsequently and it wasn’t quite like that, but it was quite humble.” He recognised that the market wasn’t necessarily going to continue giving him a 20% return on everything, but admits that there was an element of luck in his early success: “I started in March 2010, which was a good period to be long [speculating that stocks will rise] any stock. But if I’d started with exactly the same approach, capital, skill and determination in, say, August 2011, the result would’ve been catastrophically different, and I’m not sure we’d be having this conversation!”

The stock market is surrounded by an aura of mystery for most: a nebulous entity whose movements elicit panic and joy to the few in the know, and are completely inexplicable to the rest of us. While vaguely familiar with the markets previous to turning pro, Mark notes that there were a few important realisations to be made:

“There was this coming awareness that what you’re interested in is not value, worth or merit necessarily, but price. Only price. It’s the only thing that decides if your trade is profitable. Price isn’t set by a committee or, indeed, by anyone making some kind of meritocratic judgement. It’s based solely on the actions of buyers and sellers and the ways they interact, at what speed and volume and over what period of time.”

However, the reality is perhaps less abstracted than that. It seems that the reputation of the stock markets for attracting a degree of mercenary and merciless participants is very much founded. While Mark initially disbelieved stories about market manipulation, he began to see “the ways people would play games to move price in such a way to put other participants off before resuming a trend or prior price movement.” While insisting that the truth is not (as some more febrile conspiracy theorists claim) that stock markets are controlled and manipulated by evil corporations somewhere far away, Mark claims to have seen some pretty mysterious and frightening things:

“I have actually met someone who told me that they’d engineered a computerized dealing system that could place something like 40,000 trades per second. With that kind of firepower its possible for a small number of players to actually move markets, to a point and on a temporary basis”.

He gives the example of the share price of UK company RightMove. On the day of our interview, the price, which had been in a very healthy uptrend for 5 years, savagely dropped from around £15.50 to below £15 and back up again. This was over less than 2 minutes. According to Mark, this wasn’t random: it was the co-ordinated dumping of a large quantity of short sells onto the market (short selling is essentially speculating that the market will go down). Most trades will have automated killswitches called ‘stops’, set at a sensible level to prevent losses becoming too great should price turn against you. This barrage of sells literally forces other positions out of the market, as the price falls through the obvious stop levels. Then, with competitors chased out and the price substantially lower, buying commences on a huge scale. For a few short moments all concepts of negotiated value and free market pricing go out of the window and price is controlled by invisible, and extremely powerful, external players.zx

Having been on the receiving end of this rather brutal phenomenon in the past, Mark is stoical: “It’s not about fighting manipulators, you’ll lose. Its about seeing what people who are very adept and technologically and financially capable are doing and trying to get on their coat tails a bit.” Having watched this movement in RightMove, Mark actually upweighted his own position, seeing the price rise thereafter. It seems that the reputation of the world of stock markets is deserved: vicious, callous and far from suffering fools gladly. If you’re playing the markets, you’re playing with the big boys, and they’re packing more heat than a small national GDP. But, with some luck and the right attitude, it’s possible to survive and, indeed, thrive.

In the next instalment of ‘Interview with a Trader’, we take a look at the relationship between the markets and the wider macroeconomic environment. While the world economy continues to splutter along in 2^nd gear and austerity maintains its icy grip on political agendas we’re also seeing a market flying ever higher. Why is this happening? Should it be happening? And, perhaps most presciently, can it continue?