THE Q&A: JOHN SUSSEX, AUTHOR, TRADER

Scene: ground floor of the Royal Exchange, London, 1983, 8:30 am. The bell sounds, prompting a roar from hundreds of men wearing orange, red and blue jackets, shouting orders for all manner of financial contracts. Phones ring, clerks scribble instructions from clients and rush into the pits shouting the order and dealer's name. By noon, thousands of trades have been made; millions of dollars have been won or lost.

When outsiders observed the London Futures Exchange (LIFFE) from the balcony above, they likened the scene to a gladiator's pit or a bullring. It was a roiling, sweating, shouting and laughing manifestation of global capitalism, the market made flesh. All eyes—hundreds of them—were glued to the ticking movements of prices on the screen above the floor. Nicknamed "Maggie's boys", these traders thrived in Margaret Thatcher's England, a time when a certain rough-and-tumble entrepreneurial spirit challenged the City’s elitist status quo. They are the subject of "Day One Trader", John Sussex’s colourful book about life in the pits of the exchange in the 1980s and 1990s, before electronic trading put these men out of business. A former trader himself, Sussex was on the floor when LIFFE started in 1982, and continued on 20 years later, when the exchange was sold to Euronext and the open outcry method gave way to computerised trading. The result is a somewhat wistful account (with help from Joe Morgan, a journalist) about an era and a group of men who now seem anachronistic. On March 1st Frankfurt's stock exchange—Germany's largest—announced it would also end its traditional floor trading and move to an electronic system.

As debates rage about how financial markets should be changed, some insiders are hearkening back to a simpler time for traders—more macho, to be sure, but also perhaps more humane. With “Day One Trader”, Sussex has offered a tribute to this old-school method of trading that once dominated derivatives and securities exchanges around the world. More Intelligent Life recently caught up with Sussex to discuss the book and the debate over electronic trading floors.

More Intelligent Life: The book strikes me as much a story about Margaret Thatcher's meritocratic England as it is about the LIFFE trading floor. You were the 16-year-old son of a factory worker when you started your career and went on to create one of the biggest brokerages in all of Europe. Has this dynamic changed, given that most people in high finance today have doctorates in mathematics or physics?

John Sussex: The dynamic certainly has changed. A recurring theme in the feedback from readers of the book who worked in the City during the 1980s and '90s is that it was a unique period in the history of London as a financial centre; a time when there were great opportunities for working-class people to carve out careers in high finance.

It is true to say that the LIFFE floor did epitomise the Thatcherite era. The exchange floor gave less qualified people like myself a platform to display their trading skills to the big investment banks. Consequently, many LIFFE traders went on to establish top positions at elite financial institutions—this type of meritocratic rise would not be possible today even though I am sure that the talent is still there.

One consequence of the transition to electronic trading and the evolution of complex financial instruments has been that London as a financial centre has reverted back to its elitist past. High barriers to entry now exist. These include the need for the right connections, a top degree, expensive professional qualifications or an MBA and having to pass several interviews.

More Intelligent Life: One of the myths about open-outcry trading your book debunks is that rather than the pit being a "den of thieves", it has a distinct code of ethics. You even write sympathetically about Nick Leeson, the rogue trader who brought down the oldest investment bank in England. I'm interested to hear what you make of the latest scandals that have recently plagued the market.

JS: Open outcry is very transparent. All trades should be made in the pit for everybody to witness. This created a culture where the floor policed itself. A trader who stole from an order would be stealing from the pit and the transgression would be quickly spotted. The mantra in the world of open outcry is "my word is my bond". Dodgy traders did not last long. Nobody would trade with them.

As for Nick Leeson, he was a guy who got in above his head. The causes of the collapse of Barings Bank mirror many of today's trading scandals where a bonus culture and poor back-office monitoring of transactions allow unacceptable risk-taking.

MIL: In searching for solutions in the aftermath of this financial crisis, governments are asking themselves what regulation to put in place and how to mitigate systemic risk. Is there anything you think is being left out of the discussion based on your experience as an open-outcry trader?

JS: Exchange traded derivatives are settled by margin calls on a daily basis, which works well. But bespoke over-the-counter derivatives are not subject to such margin calls and are not regulated in the same way. The OTC market certainly has some lessons to learn from the way exchange-traded products are traded.

Financial institutions' increasing reliance upon algorithmic trading technology and "black box" systems certainly creates new risks. There is of course a technological arms race to trade at ever greater speeds using increasingly complex computer programs. This makes it very difficult for regulators to anticipate the possible unintended new risks such technology creates. Who knows, a "rogue computer" could cause havoc some time in the future.

MIL: About mid-way through the book, you describe the moment when you realised you were too old to trade. Do you think that a trader's limited time on the floor created a short-term incentive that was ultimately detrimental to the market? With electronic trading, has that perverse incentive been removed?

JS: When a trader becomes more successful, he can lose the hunger. The physical demands can be immense. Try standing on your feet yelling and shouting for eight hours every day! It is tough work, especially when you are competing against someone who would "kill his granny for a tick" and is 15 years younger than you. The pit does not take prisoners.

I am not sure that the more professional pit traders were so absolutely guided by the short-term though. There was a saying on the floor: "there are players and there are stayers". Traders who implemented disciplined strategies did not take too much risk and tended to do well and keep their money. These guys often worked over a ten to 15-year period. But the players who tried to make a quick buck usually blew up at some point, losing everything.

I do not think that there was a short-term incentive that was detrimental to the market. It is early days in the age of electronic trading but it still seems to be a young man's game. Older traders seem to struggle with technology while young people embrace it.

MIL: When you have machines trading against machines to arbitrage a spread to the thousandth or ten-thousandth of a decimal point, has the meaning of the word "market" changed?

JS: Not really. You still need hedgers and speculators to make a "market". There are just less opportunities for professional traders.

MIL: What's your advice to the young person today who wants to be a trader?

JS: Do it for the love of it and not to get rich.

"Day One Trader" is out in hardcover

~ KATHERINE RYDER