Bill Lipschutz: The Sultan of Currencies

PART II - The World's Biggest Market

Bill Lipschutz: The Sultan of Currencies

Quick, what is the world's largest financial market? Stocks? No, not even if you aggregate all the world's equity markets. Of course, it must be bonds. Just think of the huge government debt that has been generated worldwide. Good guess, but wrong again, even if you combine all the world's fixed-income markets. The correct answer is currencies. In the scope of all financial trading, stocks and bonds are peanuts compared with currencies.

It is estimated that, on average, $1 trillion is traded each day in the world currency markets. The vast majority of this currency trading does not take place on any organized exchange but rather is transacted in the interbank currency market. The interbank currency market is a twenty-four-hour market, which literally follows the sun around the world, moving from banking centers of the United States, to Australia, to the Far East, to Europe, and finally back to the United States. The market exists to fill the needs of companies seeking to hedge exchange risk in a world of rapidly fluctuating currency values, but speculators also participate in the interbank currency market in an effort to profit from their expectations regarding shifts in exchange rates.

In this huge market, there has been only a handful of high-stakes players. Ironically, although these traders sometimes take positions measured in billions of dollars-yes, billions-they are virtually unknown to most of the financial community, let alone the public. Bill Lipschutz is one of these traders.

The interviews I held with Lipschutz were conducted in two marathon sessions at his apartment. Lipschutz has market monitor screens everywhere. Of course, there is the large TV monitor in the living room, receiving a feed of currency quotes. There are also quote screens in his office, the kitchen, and near the side of his bed, so that he can roll over in his sleep and check the quotes-as indeed he does regularly (since some of the most active periods in the market occur during the U.S. nighttime hours). In fact, you can't even take a leak without literally running into a quote screen (there is one conveniently located, somewhat tongue in cheek, at standing height in the bathroom). This fellow obviously takes his trading very seriously.

I had first contacted Bill Lipschutz through a public relations agent, Tom Walek. Yes, a public relations agent for a trader sounds rather odd. In fact, this is particularly true for Lipschutz, who had managed quite deliberately to maintain virtually total public anonymity for his entire career despite his huge trades. However, after having spent eight years as Salomon Brothers' largest and most successful currency trader, Lipschutz had just left the firm to start his own management company to trade currencies (initially as a subsidiary of Merrill Lynch; later, the company evolved into a completely independent venture, Rowayton Capital Management). It was this project that required the public relations support. Anyway, after Walek discussed my interview proposal with Lipschutz, he called to tell me that Bill first wanted an informal meeting so that he could see if it "felt right."

We met at a Soho bar, and after downing several French beers (no joke, the French actually produce some excellent beers) Lipschutz said, "I think you'll find the story of how, in less than a decade, Salomon Brothers grew from a zero presence in currencies to becoming perhaps the world's largest player in the currency market an interesting tale." Besides feeling a sense of relief, since that comment obviously reflected a consent to the interview, his statement certainly whetted my appetite.

In our first meeting at his apartment, with my tape recorders whirring, I said, "OK, tell me the story of Salomon's spectacular growth as a major trading entity in the world currency markets." I sat back, anticipating a lengthy response full of wonderful anecdotes and insights.

Lipschutz answered, "The currency options market, Salomon's currency options department, and I all started at the same time and grew and prospered simultaneously."

"And ...," I said, prompting him to continue. He rephrased the same response he had just given.

"Yes," I said, "that's a very interesting coincidence, but could you fill in the details? How about some specific stories?" He responded again with generalizations. My hopes for the interview went into a rapid nosedive.

I've done interviews that I knew were dead in the water after the first hour and have ended up ditching the results afterwards. However, this interview was different. Although I felt that I was getting very little useful material during the first one or two hours of our conversation, I sensed there was something there. This was not a dry well; I just had to dig deeper.

After the first few hours, we started to connect better and Lipschutz began relating specific stories regarding his trading experiences. These make up the core of the following interview.

As mentioned earlier, the large TV screen in Lipschutz's living room is normally tuned to a currency quote display, with a Reuters news feed running across the bottom. Although Lipschutz seemed to be paying full attention to our conversation, on some level he was obviously watching the screen. At one point, the Australian dollar was in the midst of a precipitous decline following some disastrously negative comments made by the Australian finance minister. Although the market was in a virtual free-fall, Lipschutz felt the selloff was overdone and interrupted our interview to call in some orders. "Nothing big," he said. "I'm just trying to buy twenty ($20 million Australian, that is)." Immediately afterward, the Australian dollar started to trade higher and continued to move up throughout the rest of the evening. Lipschutz didn't get a fill, however, because he had entered his order at a limit price just a hair below where the market was trading, and the market never traded lower. "Missing an opportunity is as bad as being on the wrong side of a trade," he said.

During our second interview, Lipschutz wanted to short the Deutsche mark and was waiting for a small bounce to sell. When noticing that the mark had started to move lower instead, he said, "It looks like I'm going to miss the trade."

"That sounds just like last week when you missed getting long the Australian dollar by using a limit order," I said. "If you feel that strongly," I asked, "why don't you just sell the Deutsche mark at the market?" "What! And pay the bid/ask spread?" Bill exclaimed. I wasn't sure whether he was serious or joking-or perhaps some combination of the two. (Incidentally, the Deutsche mark kept going lower.)

Our interviews were conducted after U.S. market hours, but, since the currency markets never close, Lipschutz, apparently, never stops trading. However, despite his admitted obsession with the markets and trading, Lipschutz appeared very relaxed. I wouldn't even have known that he was watching the markets had he not occasionally made references to price movements and placed orders over the phone.

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