Black Wednesday – How George Soros Tried to Crash the Pound
Trading guides, webinars and stories
Trading guides, webinars and stories
Bill Lipschutz is one of those traders who is not a household name, yet has had a profound impact on the world of trading.
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Bill Lipschutz was born in 1956 in Farmingdale, New York. He did well in school and went on to graduate from Cornell’s architecture program. Bill also earned an MBA in finance from Cornell’s business school. Although he had a passion for architecture, he found it hard to tolerate the length of time needed before he could actually be entrusted with real design.
In school Bill did hypothetical paper trading in a class, where each student started with $100,000. By the end of the course he had accumulated $29 million (though there were no limits on leverage).
He got into trading for real when his grandmother passed on. She had left him $12,000 in stocks in her will. This was no simple portfolio, though. It consisted of a huge number of stocks, held in many different places. Having to go through the effort of liquidating these, combined with his success in his paper trading, no doubt pushed him to attempt to trade with real money.
This led him to playing the market during his time at Cornell, with the $12,000 inheritance. He would research the market often, which became a key tenet of his approach to trading. This is an important skill for any trader, and it came naturally to Bill. He finished his MBA in the pre-internet days of 1982, so research meant hitting the library. It makes modern trading research look much easier by comparison.
Over time he managed to turn his $12,000 into a whopping $250,000 over 4 years while attending university. Bill recounts much of this story in the book The New Market Wizards: Conversations with America’s Top Traders. The interviewer asks him what happened to this $250,000. Lipschutz mentions the “Granville reversal” in September 1982. The advice of the famous market advisor Joe Granville to his readers went against his long position, and he lost nearly his whole account in under a week when many people moved the market against him. When asked if this affected his confidence, Bill simply says he saw it as “one major mistake”. He said he has always been confident as a trader and remained that way, and that sharpening his skills led to his job at Salomon Brothers.
Bill was hired at Salomon Brothers in 1982, a Wall Street investment bank. This is where Bill really established his legacy. You may notice this is just before he lost his personal trading stake. This affected Bill permanently. He vowed to never trade his own money at the same time he was trading other people’s money professionally.
Salomon Brothers had its own insular devoted culture. It brought up its own traders from scratch and taught them how to succeed. As odd as it may sound, they did the same when it came to adding a foreign exchange department. Most people would expect that they would have hired someone from outside Salomon who was an expert in currency trading. Instead they just asked one of the higher up people from their bond arbitrage department to head the new FX department, even though he was completely naive to FX.
This would be a boon for Lipschutz. Things lined up for him so he could make his name in a new department that he knew a lot about. Bill was also the only person there who had experience in options, which were just starting to become widely known in the world of trading.
One of the stories of his time at Salomon Brothers involved Andy Krieger. Bill and Andy spent the day on international phone lines while Andy was sick, and made $6 million trading the New Zealand dollar. This was over one quarter of their annual profit at the time. They also had sold more NZ dollars than the size of the actual NZ money supply.
Another of Bill’s favourite stories came in 1987. He positioned himself both long and short in a position known as a bull call spread. It has limited profit per contract but if it went right it would make a huge profit. He also knew one of the large market makers was on the other side of this trade. The price on the Friday, near market close, was at a level that left both sides unsure if they should hedge or if the other side had. If either side figured out what the other had done, they would be the one profiting in the trade. Bill puts the end of the story this way:
“If he could figure out what I had done, there would be a potential play for him in the marketplace. As it turns out, I had not hedged, and I was net long the yen position. If he knew that, he could have gone into New Zealand, which is the first interbank market to open, and pushed the market against me. By telling him that they had tipped their hand by selling the yen on Friday afternoon, I let him believe that I had figured out their position-which I had-and hedged-which I had not. In any event, there was some news over the weekend, and the dollar opened up sharply lower against the yen. I actually ended up substantially increasing my profit on the trade.
[We profited] a totally ridiculous amount-something like $20 million. However, the thing that was so great about the trade was not the money but the mental chess game that Friday afternoon-all the back-and-forth bluffing. People were calling my desk all Friday afternoon to ask us what was going on between us and the other firm. There was nothing else going on in the market. These were the biggest positions in the market by a hundredfold that day.”
-The New Market Wizards: Conversations with America’s Top Traders
In 1990 Bill left Salomon Brothers, with his last position being the head of their Global FX Options Group and the NY FX Trading Desk. He is said to have made over $300 million in most years for Salomon Brothers. He retired for a short time after leaving and then came back to the market in 1995 with his own firm, Hathersage Capital Management.