The Secret Broker: It all sounds French to me
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
Got a bit of high pressure in my right eye, so I have to put in some drops to bring the pressure down.
Drug companies seem to come out with the most bizarre names for their drugs.
It’s like they all get in a room, drop some acid and then start coming up with names. One eye drop is called ‘Simbrinza’, which sounds like the name of a ponced up patisserie in Melbourne. The other is ‘Ganfort’ who I’m sure was in The Hobbit or one of those Tolkien “lost works” that pop up every now and then.
I always suspected that J. R. R. Tolkien must have been on something and now I know. Ganfort contains two medications, ‘Bimatoprost’ (blonde porn star?) and ‘Timolol’ (someone’s TikTok handle?).
Somehow these two names create ‘Ganfort’.
Weird names for things would always crop up at some point in my stockbroking apprentice days. The one that stuck out the most for me early on was ‘backwardation’.
It sounds like something my father would mutter under his breath, when trying to back our family caravan (pre power steering) into a camping spot, with my mother shouting out the wrong instructions from behind.
By the time the caravan was finally parked, it was time to leave the cheering crowd of campers and go to the next site.
Actually I think my father called this monumental feat of a reversing a “b’astdation” of a thing to do in front of fellow campers. But hey I was only nine, so I didn’t really know big words by then.
But what does ‘backwardation’ mean? In financial terms, as I soon found out, it’s something that can happen when you get three quotes on a fast-moving stock on the trading floor.
It was unusual, as it meant you could buy at a lower price from one jobber and then take 10 steps and instantly sell the same shares to a rival jobber at a higher price.
As prices were quoted in spreads of two to four pence, it could only happen when stocks were moving fast.
It was seen as a ‘gentlemen’s agreement’ not to take advantage of this situation, when quotes were getting out of whack. You had to declare ‘there is a backwardation in the market’ to the jobber making the wrong price.
He would then adjust his price for you and match the lowest bid. This meant that you could buy at the selling price and this allowed the market to become orderly once again, as there was no profit allowed to be made on a ‘backwardation’.
Later on, after Maggie’s ‘Big Bang’ in 1985, the wrong type of trader arrived. The type that would take advantage of a backwardation and pocket the money themselves.
I won’t point fingers but mostly ‘Septic Tanks’ (Yanks) got blackballed by the jobbers, who would widen the spread as they approached. That meant their clients would always get the wrong price when they were buying or selling stocks.
Then when I got into trading commodities, ‘backwardation’ popped up again. This time it had a slightly different meaning – it meant that there was a squeeze in the market.
In commodity trading terms, it meant that you could buy at the spot price and at the exact same time, the three-month forward price was trading lower below the spot price.
This happened a lot in the copper market and we would all keep an eye on the amount of inventory held at the warehouses for immediate delivery, as this could cause this anomaly in the market.
If stockpiles fell too much, manufacturers would bid up the price to get immediate delivery. They couldn’t wait three months to fulfil an order.
This anomaly led onto my next favourite term that would be used by us city types – ‘Arbitrageu’.
I actually had heard of the word before I knew its true meaning, as we had a watering hole near the Exchange called ‘The Arbitrageur’. I just presumed it was named after some famous fat and arrogant French trader.
To ‘Arbitrage’ something means attempting to profit from market inefficiencies. These inefficiencies can relate to any aspect of the markets, whether it is price, dividends, or regulation. The most common form of arbitrage is price variations.
In the copper market for example, when there was a backwardation, an ‘Arbitrageur’ would short the spot price and then buy the three-month delivery contract at the lower price, all locked in.
All they had to do now was fund the margin calls for the next three months.
So, an Arbitrageur could take advantage of a Backwardation. This is what originally a hedge fund was meant to do. Eventually, as these trades were put on, the anomaly would gradually disappear as the profits became smaller or the margin too great to fund the position.
Nick Leeson would go down as the world’s worst arbitrageur, as he was able to get it so wrong that he managed to blow up a 200-year-old bank. (Though the ones who took him on made hundreds of millions of dollars.)
Actually, what happened to Nick is that he got ‘hammered’. Not in the drinking sense but in the market sense.
When someone was about to get ‘hammered’, it meant that they were unable to meet their margin calls overnight and their position would get automatically closed out on the opening bell.
Being ‘hammered’ normally means that they close out your wrong position at the worst possible price on the day, as everyone pulls their bids and waits. I have seen a commodity price fall over 10% and then recover back to normal in under a minute of the closing out.
So, to recap:
‘Backwardation’: A mismatch of a quoted price or forward contract (think ‘hedge fund’).
‘Arbitrageur’: Taking advantage of those mismatched prices (think ‘Nick Leeson’).
‘Hammered’: Being closed out automatically when you can’t meet your margin call (think ‘Bill Hwang’).
‘Ganfort’: My eyedrops.
Knowing these words and their meanings may not help you much in life, but I haven’t lost a game of family Scrabble for over 30 years (Ed: fact check pls) and am in high demand for trivia night every Wednesday at the local.
Feel free to contact him with your best stock tips and ideas.