Eric Peters: “Today’s Central Bank Vol Suppression Will End In Spectacular Fashion”
Posted by Tyler Durden on December 3, 2017 10:35 pm
Tags: ERM, European Exchange Rate Mechanism, Eurozone, Foreign exchange option, Mathematical finance, Option, Options, Technical Analysis, Volatility
Categories: Economy ERM European Exchange Rate Mechanism Eurozone Foreign exchange option Mathematical finance Option Options Technical Analysis Volatility
After his provocative admission published earlier that he now checks “Breitbart daily and InfoWars too… You can no longer understand America unless you do“, One River’s CIO Eric Peters published the following anecdote revealing an earlier moment of his life, when as a currency trader, he learned a valuable lesson following the spectacular blow up of Europe’s Exchange Rate Mechanism, or ERM, and why the lesson from some 25 years ago, leads Peters to conclude that “Today’s central bank volatility suppression regime resembles it, and will end in spectacular fashion”.
“Let’s step into my office,” he said. So I did. He was my boss. “The firm’s most important client needs help.” I listened, uninterested, unconcerned about clients, their problems. Barely cared about my boss. I had a game to play, solo sport, and loved it to the exclusion of all else.
“They need to do a very large trade.” A twenty-six-year-old proprietary trader’s mind is rather primitive. Which is good and bad. Being young and dumb allows you to see things elders can’t. And take risks one rarely should. In 1992, I’d done both. “They need to buy three hundred million Mark/Lira.”
Europeans established a mechanism to lock their exchange rates into narrow ranges to reduce market volatility and promote economic convergence. In theory it worked, in practice it didn’t. Politicians named it the ERM.
“What would you like to do?” he asked, calm. I stood there, processing. Such a sum was extraordinary even before the ERM blew up, which it just had. For months, I’d bought options in anticipation of its demise. Honestly, it was obvious.
The ERM encouraged speculators to build massive leveraged carry positions, discouraged corporations from hedging exchange rate risk, suppressing volatility and interest rate spreads everywhere. The process was reflexive.
Today’s central bank volatility suppression regime resembles it, and will end in spectacular fashion. All such things do.
“I want to buy more!” I answered. My foreign-exchange options left me long the exact amount our client needed to buy. No other bank would sell them such a large sum. So naturally, I wanted more.
“You should sell them your whole position,” he told me, firm. I couldn’t understand, it made no sense. “Big customer orders like this usually mark the highs – never forget it,” he said. I left his office angry, irate, sold my whole position. And he was right.