A fortune in futures lures locals to Liffe: Diane Coyle looks at risk and reward for traders using their own capital (CORRECTED)
Thursday 22 September 1994
PIT is an entirely appropriate name. Crowded around a series of tiered holes in the 31,000sq ft trading floor, well over a thousand young men and women are gesticulating and bellowing at each other. About 600 of these traders are 'locals', distinguished by their bright red jackets.
Locals trade for themselves and risk their own capital, and they trade big volumes in the hope of turning a small margin into large profits. Welcome to Liffe, the London International Financial Futures and Options Exchange.
The gaudily-jacketed traders are part of the mystique of this turbo- charged market. They now account for a quarter of the volumes traded on Liffe.
When Liffe was created in September 1982 there were only a handful of locals - veterans such as Nigel Ackerman, David Morgan and John Chitty, still prominent in the pits. There are now about 600.
Liffe is a young and successful market, populated by young and successful people. For some of them, nothing will stop them flaunting it.
The locals in particular have quite a reputation to live up to. They are widely supposed to be millionaires in their twenties, fond of Ferraris and the other trinkets of wealth. Specimens of Essex man with the nous to bend the market their way through techniques such as front-running - trading before placing big orders that will move prices.
The last time a trader was caught and fined for front-running was November 1993, but there are rumours that it happens quite often.
There are plenty of traders in the pub around the corner from Cannon Street station on the fringe of the Square Mile who are keen to live up to parts of this reputation. They are not short of boasts of the 'I did a trade this big' variety. One - who coyly declines to give his name and lives in, yes, Basildon in Essex - says he has made a six-figure sum this year and reckons that is typical. He sports a Rolex watch in evidence.
David Mattimoe, a Liffe trader since 1987 and local for the past year, says locals can earn pounds 1m- pounds 5m a year if they are doing well. He says: 'People have their own drive. Most are in it for the money and they want all the trappings that go with it.'
David Kyte is one of the market's stars. He became a local in January 1985 and is now running his own company of 60 traders. He says: 'You can make millions a year, but it's not common. There are a lot of journeymen who make a comfortable living - maybe pounds 60,000 a year.' It's a lot of money, of course - especially in the hands of a 22-year-old with few financial commitments - but not quite the stuff of myth.
The myth is beginning to annoy many traders. David Morgan, one of the veterans now running his own firm of 40 traders and 20 trainees, says he tells new recruits that the way to make a small fortune in the futures pits is to start with a large one.
He says: 'Of course they are young, brash and competitive. They work hard under extraordinary pressure and they play hard, too. We have our fair share of Essex man, but the marketplace soon sorts the posers from the professionals.'
To make a fortune takes a bit of a fortune to start with. A minimum of pounds 25,000 and, realistically, more like pounds 80,000, is needed to set up as a local. Shares in Liffe cost pounds 30,000- pounds 250,000. Traders can also rent their place in the market for up to pounds 36,000 a year, depending on the contracts that can be traded. Many locals have an institutional member of the exchange providing capital backing, and also limiting their exposure.
There are some millionaires in their twenties, and rather more in their thirties and forties. The first few years as a local are likely to be fairly lean, and most take several years to build up substantial income and wealth.
Traders are unanimous about the characteristics needed to make it in the market - stamina, self- confidence, a powerful voice, numeracy, quick wit. Once in the pit, constant concentration is essential. This is as true on quiet days, when there might be only three or four chances to make a profit, as it is on busy ones.
Mr Morgan says: 'A chap who's particularly cerebral would not want to be on the floor.' Or as Mr Mattimoe puts it: 'Nobody down there is discussing James Joyce's Ulysses. I'm in it for the money, not the social life.'
The identikit requirements are explained by the 7.30-4.15 day, with traders on their feet, shouting for most of that time. It is easy to see how school-leaver trainees and young traders get caught up in their own mystique.
Mike Spiller, a local in partnership with two others, says the market is efficient at rewarding those who deserve it. 'Locals who always make prices will get the bigger orders and make more money. But they do more for the market and take bigger hits when things go wrong.' Losses have driven some locals back to work as employees.
Liffe is passionate about the advantages of both open outcry trading and the presence of locals risking their own money. They hold positions in futures for short periods and always make a market, quoting buying and selling prices in the contracts they trade.
Mr Kyte says: 'It's the perfect form of competition. Everyone, big and small, has the same opportunities to trade.' He points out that, unlike the electronic Stock Exchange, there are no delays before everybody on the floor knows about big trades, and no anonymous inter-dealer trades.
Daniel Hodson, Liffe's chief executive, says: 'The influence of locals is one of the reasons for the success of London. In other markets you get all the institutions wanting to be on the same side of the trade.'
There can be no question about the success of the market. Volumes have soared, and Liffe confidently expects the pace of growth to continue. There is talk of trebling the size of the trading floor, only three years after moving to the present site.
The reception at Kyte Futures gives the flavour of the market. The reading material consists of a football fanzine, and traders just back from the floor are bantering loudly.
Mr Kyte says he would prefer to see the market consolidate. 'A lot of investors now think they can make a quick buck, because of the reputation of the market.' Does it worry him? 'Not as much as it will worry them,' he replies.
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