Put it on tape! I overheard BSD calling!
You’ve Never Had It So Good!!!
From the 1970’s to the late 1990’s the only way to trade FX was by working in a large international bank or a multinational fund. Here “dealers” or “traders” would quote prices in a multitude of currencies via phone, telex or Reuters Dealing on request from another Bank or client. This bygone era was dominated by the largest banks and funds as they were the recipients of knowing where the market was by consistently trading for their clients or themselves. This is generally known as “price discovery”. Nowadays even the individual FX trader sitting at home in his living room trading EUR/USD has as much information as many sell and buy side institutions – albeit without the “flow” these institutions still see from clients today.
So what was a typical day like in the “good old days” before FX became “electronic”?
As mentioned above the simplest way to quote a client or buy and sell was by using the simple telephone! Dealers would call each other (yes pick up a phone and dial the other banks number!) and ask for a price in a specific amount and currency pair. If a Bank called another Bank the typical request would be:
• Bank A: Hi Frank it’s Jon from XYZ Bank. I need Cable in 5 please
• Bank B: After checking his “book” and whatever his voice brokers were quoting the dealer at Bank B would say “sure Cable in 5 is 03-08”
• Bank A: Dealer at Bank B says “5 Mine”.
• Bank B: Dealer says “Done. I sell 5 quid at 08, – speak later”.
• Bank A: Dealer says “Heard the old girl was sniffing so be careful”
So what just happened and what is all this weird language?
“I need Cable in 5 please” – here the dealer is requesting a two way price in GBP/USD in £5 Million pounds. Cable refers to the way institutions in the US would trade with institutions in the UK back in the days of the Gold Standard and before. It refers to a “transatlantic cable” laid between the UK and the USA. It’s true – the submarine cable was laid in the middle of the 19thcentury! Amounts were always in Millions. So 1 was 1 Million, 5 was 5 Million and so on. For amount smaller than 1 Million the dealer would say the amount so 500 thousand or ask for the fraction – for 500 thousand it would be “a half” referring to half a million. Likewise asking in a quarter meant a quote in 250 thousand.
The dealer “checks his book”. In these days before computers and spreadsheets/apps etc dealers kept their “positions” in ledgers. These ledgers would have all of their hand written trades – what they bought and sold – kept up to date by a “positions clerk”. The dealer would have a running position i.e. he knew if he was long or short and his Profit & Loss for the day. If the clerk was good he would know the “price” of his net open position. So the trader sees he is long 15 MIO GBP/USD at roughly 2.0390. Next he would check what his voice brokers were quoting.
Typically the dealer would plug into a line directly between his Bank and his broker. Think of it like a phone line that is connected all day. The dealer would typically have 4 or 5 brokers connected this way and he accessed them by clicking a button on his dealing console. The dealer would typically say “what are you?”, “what’s cable?”, “what you got?, “got anything?” to all his brokers and await their response. The brokers would come back with “last paid 5 nothing back” (meaning someone last bought GBP/USD at 2.0405 and the broker has no current price) “I’m figure bid no top” (meaning the broker has someone willing to buy at 2.0400 but does not have an offer). “I’m 05-12 small bid” (meaning the broker has a two way price where the volume on the bid is less than 5 Million and the offer is 5+ Million) “05-15 in regular” (meaning the broker has a 2 way price in at least 5 Million)
No aggregated view of the market here. No best bid and offer like we have on our existing trading platforms! The dealer knows the best bid/best offer is 05-12 with the last trade occurring with 05 being paid.
The dealer, who is long, now “quotes” the Bank 03-08 – meaning he is quoting 2.0403- 2.0408.
The dealer quotes this price in the hope that he will “lose” (sell) GBP/USD. This is based on his position and the current price being quoted in the broker. The dealer has to aggregate the current prices to get best bid and best offer in order to “price” the client accordingly – sounds very long winded yes?
5 Mine – Well we know 5 refers to 5 Million but Mine? This was all about speed and economy of words. Nowadays we see the price on our screen and simply click on the side we want to trade on. Back in the day it was all about shortening, or speeding up, trading. Sure enough years earlier when rates were somewhat fixed a dealer would say “I will buy 5 million pounds at 2.0408 please” Mine means Buy – other “shortcuts” for buying were “Ill have em”, “you lose 5” conversely to sell dealers would say ”Yours” or “you’ve got em”.
So the dealer confirms that he sells 5 million at 08 back to the buyer. But what is “quid”? No one is 100% as to this slang term for GBP but many believe it is derived from “Quid Pro Quo” which is Latin for something that is given or taken for something else. Makes sense as GBP has been around for hundreds of years and was a major trade currency long before the USD.
And finally “I heard the old girl was sniffing”! Is the dealer concerned that an elderly woman has a cold? Not quite. In fact the dealer is referring to the Bank of England!! The Bank of England has been known as the “Old Lady” of Threadneedle Street since it moved to that location in 1734! Old Lady equals Old Girl. So the Bank of England is sniffing? Central Banks would call Banks enquiring as to where the GBP/USD exchange rate was. As a central bank, enquiries were taken seriously and, invariably, could result in the BoE buying GBP to support the exchange rate. Therefore the dealer is warning that the BoE has been checking rates and might be looking to come into the market and buy GBP/USD.
So that’s the “anatomy” of an old school trade before the advance of electronic trading. You should also note that the trade was “done” orally – no STP (straight through processing of the ticket or confirmation of the trade). That would be done later by the Banks back office team.
And we haven’t touched on some other slang terms that are still commonly used so watch this space!!
So – we are very fortunate to have seen FX become more and more automated – but the question is what will FX be like in 20 years from now????