Nature of the Beast | Planet Finance (1/6)

foreign man-made or other disaster that affects planet Earth adversely may be viewed in the opposite way for those who are trading the markets [Music] so famine War make the markets go up and for anybody who's playing the markets and investing that's more of an opportunity to make money the commodity Traders nightmare as they wake up in the morning and the headline in the newspaper says peace declared will be a journey to a parallel world a world with a bad reputation [Music] when there's Market dislocation no matter how it's caused you should try to use it to your advantage it's like never waste a disaster almost volatility is what we need volatility is our friend when things are calm we can't make too much money [Music] but also a world seemingly detached from reality which part of your career was the most profitable this question 9 11. [Music] 911 was that was my best year ever and I hate that to be honest there is a world made up of numbers world where you have to be the smartest or the fastest [Music] a world connected by radio waves and fiber optic cables a world where you can make money if you think you know what the future holds a world of fear and desire [Music] where you can win [Music] I call this world Planet Finance for most inhabitants of planet Earth myself included Planet Finance is a complex invisible but influential world and for many people a world with an enormous appeal actually in my pocket here I have for example this is like a 250 grams of gold okay I want to sell these right so there's this phrase this kind of motto Buy Low sell High that's kind of what you want to try to do it all right you're given one million the goal is to increase that amount when you look at all these numbers and graphs it can be quite overwhelming but there is one very important aspect to think about is about trading it and about trying to make money here it seems so easy to create wealth an ever-growing world where Capital yields better returns than labor but this is really where all the magic happens for me it's a distant world that only comes into view when the financial markets crash Dow collapsing its worst scene as they did in 2008 when Investment Bank Lehman Brothers collapsed followed by the European debt crisis which brought Greece to the brink of Ruin or at the start of the pandemic after the first lockdown was announced all markets crashed at once a unique event in history an historic day here on Wall Street because investors are expecting a potential Global recession because of the coronavirus it takes two months before the traders of the New York Stock Exchange are even allowed back on the trading floor lockdown after lockdown the whole world holds its breath and around the globe shop windows are boarded up for protection against potential looters but on planet Finance soon there is no real worry anymore on the contrary the stock prices Skyrocket again and not only those of the luxury Brands like always the market moves and then goes right back to normal so if you survive the initial shock it markets tend to go back to normal so while planet Earth is still picking up the pieces Planet Finance is already making big bucks again how is that possible how can the interests of planet Earth and Planet Finance be so different looking for answers I arrive in the Mansion dotted Woods just above New York City most of the inhabitants of Planet Finance aren't exactly eager to provide insights into their world I wrote two books sitting here is it going good place to ride we don't want to tell the truth about you know some of the pricing structures here and and how they impact you know the real world and you know that kind of stuff my Trader does want to talk he spent decades on the trading floor but now has his doubts about the way Planet Finance functions plus he has already made his pile so he can speak freely to me we create money out of pieces of paper worthless pieces of paper worthless but you know the world decided that they had value and so we could we found ways to create the you know make a living from that stuff you know it's just a construct so that you know people can make money I tell these stories and I laugh about them and everybody's eyes roll back into their sockets and then you know after a minute and a half this is boring I gotta get out of here it doesn't hold any interest for anybody nobody gives a [Music] except for Michael he knows the truth about all this stuff as well as I do you know he's he's really the guy who should interview I mean he's amazing he's a very bright guy Michael that's Michael marks another former Floor Trader he turned his back on Wall Street a long time ago [Music] the nature of Wall Street is every man for himself kill or be killed you know eat or be eaten I mean that's the nature of the Beast and so that that wasn't something that um that resonated with me enough to stay there the nature of the Beast to understand what that is and what planet Finance has become today it's important to him to First explain how things used to be on the trading floor now let's see here we go is that upside down so this dates back to the mid 70s and before and these were all around the side of the trading floor every transaction was registered there there were two board boys as they were called for each board one on the left side and one on the right side you needed one right-handed and one left-handed because they were you know writing as quickly as possible [Music] The Exchange had a reputation of trading everything there was silver coins there was imported boneless beef and there was a Cotton Exchange there was a cocoa exchange there was a coffee and sugar exchange and all of these exchanges had been set up maybe a hundred years ago as a Marketplace for merchants in those particular businesses to meet and buy and sell so it was a marketplace where buyers and sellers would meet in the 1970s their bids were still chalked onto the so-called book what you see here is the book this is the book yeah this was the pre-electronic book you know yeah yeah a Blackboard on the left hand side the amounts and which Traders had sold and on the right hand side which Traders on the floor had bought and at what price so you could read the price action by being on the floor you saw orders coming in and out you would see somebody start to buy for example and you might know from his his demeanor is this going to be in order to buy one contract or a thousand contracts you know or this guy is always a big buyer or a big seller so just by being there even though if you did not see the orders you still had a sense of the flow and the feel and you would hear it and smell it it was in the mid 70s was when New York was on the verge of bankruptcy so the streets were dirty there were you know drug dealers all around and and whatnot and the New York Mark was one of those about 10 blocks north of the World Trade Center then you would walk into this magnificent building five stories high and there were two enormous doors maybe you know 12 feet high uh that were pretty soundproof so on the outside you didn't hear much and it was almost like walking into the Coliseum and the doors would open and then you would you would be blasted by this Roar of of of of noise and and sounds and smells and I couldn't stop smiling one I when I walked in I had no idea what it was or how it worked or whatever it was it grabbed me there's no code so if things were quiet they'd be doing the New York Times crossword puzzle in the ring they'd be eating their lunch and Pizza in the ring they'd be smoking on the floor uh there'd be fist fights and you're sweating you know you're rubbing elbows you're getting stabbed by pencils and you're getting spit on on planet Finance Traders are already a special breed but Floor Traders can even be seen as a Dying Breed Michael marks has relocated to the neighborhood where he once grew up the only ex-colleague he still regularly sees is Dan Dicker so where's your car there it is that is that your driveway yeah okay good yeah the one no no I I've got that house too oh really yeah it's under construction but I needed a little more room here so yeah oh buy another house plan a good plan they did well for themselves on the trading floor and now look back with a mix of slight Nostalgia and diabolical Glee I would go into the World Trade Center and I walk would walk up the 10 blocks to get to the exchange one morning I'm walking up and everybody on the street is looking at the towers you know I'm walking in the opposite direction they're all looking at the towers and I look and there's a guy climbing up the side of the towers so I get to The Exchange and of course everybody's looking and there what do you think they're doing their betting yeah how many floors will go before you fall yes it's nice they're betting whether he's going to make it or not what floor is he gonna fall off from yeah that's classic that is perfect Floor Trader stuff yeah exactly exactly so can I describe you well as being a small Trader oh I was minuscule I was the smallest of the small for this and it was very very very uh stressful um very exciting uh very lucrative and um and scary all the same time in what sense Carrie I always use this analogy and if you can't put this on TV I understand but imagine being a man in your 30s walking into a place dropping your shorts taking your testicles out and stick them on a table taking a Cleaver and hanging them to the next guy and daring him to cut them off before you can yank them back every day that's what it was like I think part of the Allure was no one understood when you came in from outside what is this how does it work how do you do this there was it was pure capitalism it was absolutely as pureest form you know it was the Turkish Bazaar you know come alive come one come all everyone participates it looks like a sporting uh event with money the market has a sporting event with money apparently that's what it takes to determine the price of a product meanwhile Michael marks was elected chairman of the exchange he saw the opportunity of starting a new market a market for a product of which the price up till then had been established in an obscure way a market that would go on to determine the global price of crude oil and one that would even grow into one of the biggest markets in the world how do you start how do you start a new market when you start out you don't know it's almost like a chicken and egg I'll use it if you use it you know you'll use it if I use it but how do we know that each of us is going to use it [Music] in the 50s and the 60s most markets in the world were managed and price controlled [Applause] [Music] oil had always been a monopoly or an oligopoly which meant that there was one person or a group of people who were controlling the production and setting the price you didn't know what prices were [Music] they would meet in a tent I'm exaggerating but all the producing countries would meet and they would powwow and then someone would would emerge from the tent and say the price of crude oil is now eight or the price of crude oil is now 10 so that was how prices were set I till well into the 1970s the price of oil wasn't determined by supply and demand but by what the powerful oil companies and oil producing countries asked for it so Michael marks thinks there has to be another way to do this for a product that's in such high demand around the world I just felt that oil should be priced in a free market environment rather than buy a cartel and it seemed obvious to me I couldn't understand why others didn't see it that way I mean a couple of people who I knew said it'll never work the major oil companies will come in and they'll kill it after I think when the shaw was overthrown in 79 that's when things really um got out of control that created a big disruption in Supply the unrest in the Middle East makes one thing clear uncertainty about the supply of crude oil means uncertainty about the price those kinds of things created more risk and and that's the essence of what a Futures Market is it's great to use it for speculation but the whole idea is to offset risk if there's no risk there's no reason for a Futures Market without risk you can't start a market s isn't going to sell the oil himself but starts a market for so-called oil futures to be bought and sold on the trading floor a future is a bet on the price of crude oil going up or down in the future from now on the global price of oil is determined through speculation [Music] the atmosphere on the floor of the exchange was you know excitement right you know thrilling you know the Market's up uh opportunities to make money [Music] [Music] but for me that's when I realized the consequences of it when things were getting supercharged uh yeah as they are in the markets today you know in some form there's a disconnect between what may be happening in the stock market and and the grain markets uh for Wall Street and what may be happening uh on the ground that's that's kind of that's kind of a joke of all these financial markets right they're supposed to be these sort of uh value creators right we use these markets so they're going to sign value to things that we really don't have any idea of what their values are and that happens a lot but what also happens a lot is is the other thing where you know the the the monster in the machine sort of gets away from the purpose that it was created for stir in the machine Traders have to make use of any unexpected event that occurs and Dracula I mean how could you not like them he is doing that on the Chicago trading floor is oil Trader Bob iaccino [Music] whether it's the Russian currency crisis or 9 11 the London train bombings the Spanish train bombings volatility is what we need as active investors and act and active Traders during the attacks of 9 11 the volatility was something I still haven't seen either before nor since so for people who don't understand what volatility is the very simple explanation of volatility is it's an expanding or a Contracting of price ranges when volatility expands the price ranges of that asset expand that's what causes volatility expand when volatility contracts it's the same thing volatility has expanded in spurts in periods of time so there is a lot of volatility during an unexpected event the prices go all over the place and that gives us Savvy Trader a chance to make a lot of money when things are calm we can't make too much money [Music] I was on the floor when 9 11 happened I was in the interest rate pit the interest rate pit was one of the most active when the planes first hit and we had Banks of phones in front of us and the phone rang and then the other phone rang and then the other phone rang it was very common for us to have two phones at once on the trading floor I would have four six I would have two in each hands and I'd be going like this yelling at someone to pick up the other phone people just screaming what's going on it's interesting when you hear people say what's going on when they can actually see what's going on there's a weird psychological thing that wants they want it to be explained as to why it's happening but they're saying what's happening like you can see in front of you what's happening but if I tell you why it's happening how is that going to change what's happening that's kind of a shortcoming of a lot of Traders is they they ask what I consider to be the weakest question in the hierarchy of questions when you're an investor which is why sitting there wondering why something's happening and while you're wondering why it's still happening so you have to react it's so you are a what person I'm a what person yes y comes later why is a hobby why is fun for me but what is what I do for a living our Traders survived 20 years on the Chicago trading floor by not asking why something is happening on the market [Music] meanwhile Planet Finance is growing ever faster in value than the real economy and Planet Finance is starting to bulge at the seams I said this is what a commodity retired commodity Trader does feeding the birds see I've made I've made the transition from what what do you call that planet Finance the planet Earth thank you as it turns out Michael marks got out right before the Big Market expansion floor trading was very lucrative and very profitable you had to be a member of The Exchange to buy and sell so it was a club a club yes you know a club and where you like together owners of the club or yes yep you know it was a club a very uh very interesting Club but yeah it was like a club and just being a member of the clubhouse was a very big deal in the club until the beginning of this Century only the members of an exchange could trade directly on it but now that system has had its time so that the memberships had a value and so there was this transition when exchanges went from being a club to being public a stock market that floats itself on the stock market an exchange that becomes a company with shares forcing its club members to sell their membership forcing let me put it this way they receive an offer they can't refuse I I bought a seat very early on in my career so what is your favorite fifty six thousand dollars fifty six thousand dollars well I sold it I sold it in two thousand I shouldn't say this but I sold this in two thousand two thousand six for eleven and a half million dollars yes ma'am it was a good investment so you were just lucky ah just lucky I'm just lucky it was like hitting the lottery but it wasn't like one person hitting hitting the lottery there were 400 floor members that hit the lottery all at once I mean it's it's a story that's never been told and it's it's extraordinary if you can imagine you can't I mean how can you imagine something like that so what did it mean for the exchange then The Exchange went into electronic trading around the turn of the century exchanges across the globe become electronic now millions of people have a buy and sell button at their fingertips on their computer or trading app and along with these new customers Planet Finance continues to grow of course New York and Chicago are the mecca of the financial markets but Planet Finance spans the entire Globe from the US to Frankfurt Dubai and all the way to Tokyo here at the Tokyo Stock Exchange Floor Traders used to yell and gesticulate wildly as well today it is more like a spaceship where transactions are carried out by a computer the role of humans is now reduced to keeping an eye on that computer [Music] is you're not um no is it Paul for a market or anyone to really predict the future too high so this is foreign [Music] yet it's a creature that ping pong's financial data between payment apps Banks businesses and stock markets around the world [Music] across a high-speed Network created specially for a very select group of clients all the stock markets worldwide are interconnected one millisecond can make the difference between profit and loss to understand how this works I visit the designer of this network the existence of which most people are oblivious to we serve the people that buy and sell on the exchange and it's mostly the professional Traders so things happen here things happen there people here need to know what happens here and they need to know it very quickly we're a bit the Postal Service of the 21st Century and so what types of information are being sent from one place oh you would be very disappointed it's super simple information it's really saying did the market go up or did the market go down or if you don't send anything the market didn't do anything it's very very simple and so why do they come to you it's not because they love me it's because we're fast [Music] you read the fast or you serve like you know second-tier people [Music] you know something's gonna go up and you buy it first you probably win one increment of price but if you can do it many many times then accumulates to a sizable Revenue so you are connecting the world's exchanges yes we're really connecting the most important ones don't forget the trading floor as such doesn't exist anymore transactions now take place in data centers impenetrable fortresses where machines trade and compete with other machines boxes located in residential or industrial areas far away from the Financial Centers in places that ideally at least are free from dangers such as earthquakes nuclear disasters and terrorist attacks have you ever been inside an exchange yes I have we try to get into an exchange just how does it look like could you describe it it's horribly boring it's like rows of computers with a lot of air conditioning which is very noisy and you have all these lights going it's not fun like there's nothing to see there perhaps there is nothing to see but thanks to these super fast connections the distance between exchanges is now so small that time and place have practically become one especially since the exchanges of Amsterdam Brussels Paris Dublin Lisbon Oslo and Milan are all located in one and the same data center in Bergamo Italy it's like Milano you know High fashion data center it's clean it's not noisy it's just beautiful Italian design what's interesting is it's a little bit like a beehive so everyone wants to plug to the queen as closely as possible [Music] some exchanges organize their data centers so that the distance to the queen to the matching engine is always the same what's a matching it's just another computer it's a computer which takes buy and sell orders and matches them that's why it's called the matching engine a matching engine it's the modern version of the trading floor tronic supply and demand meet here this is where the price is set the consecutive prices form the price action without a matching engine there is no trade no Market on a computer information will travel from one port to another port and the routing it takes the physical routing will impact the latency so that's a very physical thing it's not a physical thing that you'd be interested in or that you know 99.999 people percent of the people might be interested in but it's a physicality That Matters to professional Traders but apparently for this 0.001 of professional Traders this speed is important enough to roll out a network that's worth hundreds of millions of euros how does our physicists do that to show how this works I've come to the east coast of Japan because this is where the global trading day opens and where from the other side of the ocean a special fiber optic cable enters the continent financial data is sent through this cable such as the closing prices of the Chicago Stock Exchange or a new interest rate foreign foreign straight to a so-called Landing station [Music] and from the antenna on top of that Landing station the financial data is sent at the speed of light over the Paddy fields over the heads of the visitors of an amusement park to the data center of the Tokyo Stock Exchange nearly a hundred kilometers away so how fast does a data travel through these connections so the interesting is nobody cares about the absolute speed people only care about relative speed you don't need to arrive fast you need to arrive first and it doesn't matter if it takes a hundred milliseconds or if it takes 10 milliseconds as long as you first you're fine speed is a relative concept but those milliseconds can actually make the difference between billions of profit or nothing [Music] globally my clients probably make up for more than half the volume on the big exchanges it's it's huge [Music] my favorite place where we're installed is on a mountain called and it's an incredibly beautiful place when I go on vacation now and before I used to look at churches and I look at antennas you know it's just this is the only thing I seek [Applause] and could you show us some of the equipment that you put in to the towers [Applause] oops so that is a typical radio this produces the signal and it's directed to the antenna and the antenna shoots to the other antenna which could be a hundred kilometers away if you plan a connection to One exchange and another how do you go about it's it's super simple so first you have to not be on the side of the flap Earth people you have to recognize the Earth as round so you drop a pin on one exchange you drop a pin on the other exchange and you draw a line between the two of course it's not a straight line because it goes around the earth so it's called a geodesic and what you want to do is you want to put your Towers on the geodesic they need to see each other when my business is is very predictable I do a very simple Plumbing in a very complex world we started out with chalk on a Blackboard and this is where we are now on planet Finance the future already takes place milliseconds from now [Music] any knowledge what then is the role of the trader in this network of cables antennas and machines all right this former high frequency Trader who bought and sold within milliseconds initiates a group of econometric students into the game of Planet Finance let's cause some Chaos Black Swan yes yes yes I'm in all right here we go [Music] the bid for 40 000 there I don't know if anyone wants to sell to that forty thousand okay another bid for 35 000. the 34 900 is Trading oh look there's a bit of 35 000 there oh I've almost missed [Music] messed up it has to be about fairness and the person who's got the lowest offer and the highest bids have the priorities you've got to think do you want your orders resting in the book to capture these opportunities okay that's again somebody bid for 35 000. where did my money go you lost it and and that person's trading the 35 000 is Trading is anybody else wanting to be on that 35 000 that's trading I think it's mine hey I got two million euros I got 1.5 damn oh lots of prices traded all the way to 30 000. whoever bought at thirty thousand start of everyone's reach take it who's making money did it feel like you always were in control no no nowadays it's done a lot by um algorithms you know you've got like these Bots that are doing these and it's about but it still doesn't mean you can just leave it to the bot it's about confirming that bot thinking about the strategy behind that bot because in the end it's your ideas of what's going on um but the main thing that I think will always be there is that requirement for being calm Under Pressure so when you see a big event happening what emotions go through in your head it's like fight or flight kind of thing it becomes quite incredible how markets can actually react and in certain situations how hard is it for Traders to keep their footing among all these algorithms are there feelings of euphoria greed and fear different from when our Floor Trader voluntarily put his balls on the table day after day to find an answer to this I travel far away from Wall Street to the American West to a famous ski resort overlooking dollar mountain and to a woman who was allowed to look inside the minds of Traders trading and investing is literally the hardest mental game on the planet there's nothing that's certain about it everything's ambiguous it can change every moment it never ends it's a bit like poker except no hand ever ends and no one wins the hand and there are no absolute meaning of the cards you get marked at the end of the year there's typically a December 31st number that artificially ends the game so like in sports your job is to make something happen in markets your job is to react to what's happening this neuro psychologist who once worked as a Trader helps the newest generation of traders to play the game and to recognize their own emotions and then put them to use hey she regularly has sessions with her clients and by way of exception I get permission to listen in you're not the only one I mean maybe there's somebody out there that it has really made sense to but it's not what I've been hearing so most of my clients are professional investors slash Traders yeah where do your clients are located London Singapore Hong Kong Australia New York obviously California surely as many outside of the United States as it is in okay so if you could just listen to your intuition you would do what short the s p I talked to them twice a week at first a lot goes on in the market in a week many of them talk only to me about some of the things they talk about I had one recently where he he wanted his wife to join to talk about the stress that he came home with and how she could see whether he made or lost money that day and you know it's affecting the kids and whatnot [Music] he's in a really volatile market and you know he's working 18 hours a day and and you can imagine his wife is like yeah they had a nanny or even two but help I can't do this you know so I mean on some level you're afraid right that so if we did like one to seven how afraid the guy they'd give him a billion dollars to trade it means 40 somethings and they get on the phone with me and say things like but I didn't make money today I didn't make money every day this week I made money 22 days before that but I didn't make any money this week I'll be like you know there's still like they held themselves to this really actually irrational and I don't use the word irrational too much but irrational standards and they ask you to talk to the biggest investor that doesn't mean anything sorry I'm laughing at you so I'm laughing at you because it's like I don't think they're worried about your performance or your perspective but you made money didn't you make money the nature of playing the market game no matter who you are is assessing what you think you know how it will play out and being simultaneously aware of their stuff you don't know there's usually a reason why a market moves happens in some group of people meaning some amount of money are trading on that particular reason so you have these different groups of people with different amounts of money with different sets of beliefs and coming up with some schema or mechanism to interpret that and to evaluate the risk of what you might not know is how you win streak whether you research or trade or whoever invariably the market will come back to punish you and you'll lose that winning streak just it's just impossible to be there's perfect predictions or machines right there's a constant uh chipping away at your ego well first of all it's the hardest game on the planet you know it's completely uncertain and it's completely ambiguous it's it's it's kind of just interplay between the superego and the ego and or in theological terms it's like God and and man and you know you're trying to become a god yourself but then God reminds you that there's only one God and you're going to be punished and you're gonna be yeah my Smite will come upon you or something like I'm constantly asking my clients what's the worst gonna happen how could it go wrong well what will it mean if you're wrong about this and it's uncomfortable to deal with the fact that you can't know and it's that feeling that caused you to do something it's that feeling that it causes you to recommend it's the lack of that feeling let's say concern doubt anxiety fear Panic that might cause you to hold back so you have to come up with some lens through which you see what seems to be like a chaotic system just the ability to tolerate taking a risk so you have to enjoy always yeah that's fair enjoy navigating enjoy playing with it so it's about playing with risk in the following episodes I will meet the inhabitants of Planet Finance who day in day out enjoy risk I will show how risk can be a business model so how do you make a business out of that well the business is being able to predict that risk and price it this one's personal it's just a little too personal to go into how you can make risk work for you and sometimes using the risk to your advantage means not losing a ton of money I won't offer investment tips or wage a crusade against Bankers or the top one percent but I will take you on a journey to a world which is ours yet also a planet in itself I call this world Planet Finance [Music] [Music]

Channel: vpro documentary

Views: 536,863

Keywords: vpro documentary, documentary channel, vpro

Id: WWdXI1_En9A

Length: 50min 22sec (3022 seconds)

Published: Tue Aug 01 2023