Investment banking: The Rush of Risk

Manis Thanawala / 46
Director, Greenback Forex
Thanawala plays with risk every day. He advises companies—exporters and importers—on what positions they need to take in the foreign exchange market. His analysis depends on the value of their sales revenues, or raw materials that get affected due to the daily volatility in the currency markets.

Stress Release
Thanawala looks forward to his morning routine. He starts his day at 5am with a cardio-intensive exercise routine. He is training for the half marathon. He finds that reading is the best way to de-stress. Thanawala averages a book a month. At the end of the year, he gifts his clients a book he has read that is most relevant to the markets.

In may 2013, India was in the midst of one of its worst financial crises in decades with the rupee hitting a series of record lows against the dollar. On trading floors across the country, testosterone levels rose as the rupee plummeted. Manis Thanawala was confident that the Reserve Bank of India would intervene, and that the rupee would not drop below 60 to the dollar. The Mumbai-based forex trader, who runs Greenback Forex, advised his clients to remain calm and not get agitated over the extreme swings in the currency. But the rupee continued its downward spiral and, by August 28, it slid to a lifetime low of 68.85. Sitting in his Mumbai office, Thanawala calmly recalls that volatile period. Nothing in his demeanour—not even a facial tic—betrays any turmoil. It was just another day in the office, a risk-ridden, adrenaline-fuelled day, where millions are made or lost in the span of a second.

Traditional high-risk jobs such as fire-fighting and soldiering have a high fatality rate. Neurosurgeons operate on people’s brains; F-1 racers defy G-force, and window cleaners scale the glass facades of skyscrapers. Then there are traders and investment bankers, those who invest other people’s wealth, or gain from the world’s financial markets. It’s an adrenaline-inducing job where a hard hat and a bulletproof vest are replaced by a suit and tie. Where risk, as Thanawala says, “becomes a habit”.

Thanawala plays with risk every day. He advises companies, mainly exporters and importers, on the positions they should take in the forex market depending on the level of their sales revenues or raw materials that get affected due to the daily volatility in the currency markets. He is a risk management professional who deals with extreme situations all the time.

As India treasury head of South Africa’s FirstRand Bank, K Harihar, too, had to rethink investment plans when the rupee tottered last year. And like Thanawala, Harihar was one of the few in the industry who felt that the rupee would recover soon and not move in a one-way spiral downward, as feared by some global investment banks. “Those who read correctly and had risk-taking abilities, bought and laughed all the way to the bank when the [RBI’s] tightening measures started to unwind by September,” says Harihar.

Hari, as he is affectionately called, provides retail and investment banking services to customers. They also do “prop trading”, where bonds and currency trades are placed with the bank’s own money. Deals start at Rs 5 crore in the bond market.  Apart from monitoring news, he spends time forming connections: The impact of El Nino on the bond and forex markets, and by how much will poor rainfall affect crop output, raise the need for subsidies, impact budget deficits, the government’s borrowing programme and the resulting reaction from global ratings agencies.

He calls it a case of Chernobyl potatoes. In his book Liar’s Poker, Michael Lewis narrates a scene where a rookie bond trader sits at his trading terminal. He gets a call from his senior colleague, Alexander, who had just bought crude oil futures for clients. Alexander tells him to “buy potatoes”. It’s a reference to the 1986 Chernobyl nuclear disaster, which caused huge radiation and hit the European crop hard. According to Harihar, it spurred a rise in global potato prices, especially for the premium uncontaminated American variety. Later, Alexander asks his junior why he did not buy a potato contract, to which the young man replied that he was not told exactly what to do and how much to buy.

Nithin Kamath / 32
Founder and CEO of financial services company, Zerodha
Kamath trades in the derivative market every day. To reduce risk, he prefers to play with only 5 percent of the capital.

Stress Release
He has a passion for martial arts, and has invested in his own gymnasium, Fitness Fight Club, where members are trained in krav maga, jujistu and kung fu. He regularly flies in international fitness fight trainers to train the gym members. Kamath is passionate about poker, a game he feels is similar to financial markets.

“The ability to convert a Chernobyl news item into a potatoes futures trade and then a fortune by seamlessly connecting it all calls for expertise, quick decision-making and a risk-taking capacity,” says Harihar.

The industry has evolved safeguards such as software and statistical formulae that help maintain low exposure to potentially high-risk situations. But their efficacy often comes under the scanner. Lebanese American writer, scholar and statistician Nassim Nicholas Taleb—the author of Black Swan who sees himself as a financial philosopher—has criticised some of the quantitative risk management measures that financial professionals take, claiming that they are not as effective as they claim to be.

And everyone takes a hit at some point.

Nithin Kamath was barely in his 20s when he first lost a sizeable chunk of his money in the futures and options segment. It was 2002, and the derivatives market was emerging as the newest and most lucrative playing field. A derivative is a financial instrument whose value is derived from and dependent on the underlying value of an asset, such as a commodity, security or currency.

Kamath had made around Rs 5 lakh in the stock market, and lost the entire amount when he entered the unknown derivatives market, or the “snake-pit” as some traders call it.  He had been trading since the age of 16, and his setback firmed up his resolve to make the snake-pit his fiefdom.  Today, the 32-year-old runs his own company, Zerodha, headquartered in Bangalore. He has a team of 150 people; the average age on the floor is 25. His number one rule to reduce risk is that they work with only 5 percent of the capital.  “No matter how greedy I feel, this rule cannot be compromised,” he says. It has defined his risk management policy. For him, risk is nothing more than an “uncomfortable position”.
 
Kamath’s mantra goes against the popular portrayal of life on the trading floor. Hollywood productions like Wall Street, Boiler Room, Margin Call and more recently The Wolf of Wall Street have simultaneously glorified and vilified the mean, greedy trader who plays as hard as he works. (For some reason, they’re all men.) And the trading floor is constantly thrumming with phones ringing, tickers beeping and people yelling.

It’s a romantic portrayal but as real as bumping into a cowboy with a Stetson and spurs in a Mumbai pub. The reality in India, at least, is different. Trading at a modern brokerage house is organised and relatively quiet, compared to the chaotic days of the ’80s and early ’90s, when a client’s orders were placed through a hotline or by physically running to the trading floor to carry out instructions. In previous decades, with India’s economy still not open to foreign investment and largely insulated, global developments and news flow were unreliable. Today, the shouts may be muted, but the risks are higher.

Kaushal Jaini / 38
Head of wealth management and research, Dani Securities
Jaini has over a dozen years of experience in trading and building strategies for clients, after having previously worked at ICICI Bank and Edelweiss Securities.

Stress Release
At work, he is consumed by statistical data and global market developments and their interplay. Outside work, he relaxes by paragliding, and listening to sax and bagpiper music. He makes time to visit a local temple. “This is when I meditate. A short 15 minutes is enough to recharge my batteries for the next week.”

There are some nightmarish days, where no risk management policy can stem the tide of panic that financial markets are susceptible to. “And all you can do is fight. Don’t run from risk, fight it,” says Kaushal Jaini, 38, whose stand echoes the ‘flight or fight’ hormone or adrenaline that the body produces in response to stress.

Jaini works at the Mumbai-based Dani Securities, where he advises clients on investment and trading strategies in commodities and equities. He recalls one case where he fought instead of fleeing. A client had invested about Rs 60 lakh in gold. In a sudden market development, better-than-expected housing data from the United States pulled the dollar up and dragged global gold prices down. Local gold prices in Mumbai also slid causing an immediate loss of over Rs 50,000 for the two lots of gold that the investor had bought. Jaini urged the client to stay invested even as prices fell further. It was a specific event-led fall, but the fundamentals remained strong, Jaini told him. His analysis was accurate. “It is okay to take 2 percent additional risk and earn 5 percent more. If you don’t take a risk, you will never earn,” he says.

However, recent scientific research shows that a trader’s risk-taking ability is compromised under extreme stress. In February this year, a research team led by neuroscientist Dr John Coates—a former Goldman Sachs and Deutsche Bank derivatives trader—studied the effect of the stress hormone cortisol on the behaviour patterns of City of London traders. In times of stress, cortisol is secreted by the adrenal glands, the same glands that produce adrenaline. Coates found that under high stress levels, traders were more hesitant to take risk.

Jaini, whose childhood years were far removed from such stress triggers, started to understand the elements of risk-taking from his college friends who dabbled regularly in stock trading and placed the odd bet on cricket matches. “I did not take risks or place bets then, but started to understand their risk-taking capabilities,” he says.

With an MBA, backed by fundamental and technical analysis to valuate firms and their profitability, Jaini owes his career choice to his college friends who indirectly advocated that there was nothing to fear in risk-taking. “I have learned to accept financial risk; if I lose money in trade, I accept it. It makes me a better wealth manager. The market will give you enough opportunity to make the money back. Now it is in my blood,” he adds.

Jaini’s father, who is more conservative, may not always agree. “But I tell daddy, ‘Let’s see what happens [if we take a risk]’. It’s like this: My father will say, ‘Let’s buy Wipro’. I will say, I see a new guy becoming an Infosys, let’s go for that,” the bespectacled analyst says, explaining his investment philosophy.

K Harihar / 52
Head of treasury (in India),  FirstRand Bank
Harihar monitors the India treasury operations for the bank, which provides retail and investment banking services to its customers. They also do “prop trading”, where bonds and currency trades are placed with the bank’s own money. The minimum ticket size in the bond market starts at Rs 5 crore, while forex market deals would be of a larger size.

Stress Release
Hollywood action and “inane” Bollywood films. He especially enjoys watching Vin Diesel movies. Every morning at 5am, he works out at his gym. The risky nature of his job is also carried over into his holidays: Hariihar often goes parasailing in Pattaya.

The path to profit and success lies in logic and emotional disconnect.  A successful trader or investment banker is one who has the ability to keep calm and carry on. They say that it’s the only way to deal with a volatile market that can blow up in your face at any given time. They point out that it’s the only way to stay in the game for the long haul. It’s the one route to avoid getting a heart attack.

In 2006, when he was 27, Kamath purchased a call option for about Rs 18, and watched it touch Rs 120 within a few days. The settlement of the derivatives market takes places on the last Thursday of every month. But a day before, on Wednesday, the Nifty fell by nearly 150 points. The value of the option started to slide. On settlement day, the option expired at zero, and he lost out on a lot of money. Had he sold his options at around Rs 120, he would have made huge profits.

Kamath did not know how to react. He went for a long run, but that did not help him. He suffered many sleepless nights. Then he realised that he had to take control of his emotions. He began pushing his body physically in tandem with the mental stress of his job. He trained for triathlons and marathons, and would cycle regularly. While he sweated it out in the gym, he found his concentration and mental agility improving.

Today, Kamath immerses himself in mixed martial arts. He has invested in a Fitness Fight Club, a gymnasium that trains people to fight using techniques from krav maga, jujitsu and kung fu. He sees himself as a martial artist in both the derivatives pit and the fighting pit. “Every fighter needs an edge. He should know his weaknesses. It’s the same with the derivatives market.”

Jaini finds peace in the skies. He enjoys paragliding, which he does regularly at H2O water sports complex in Chowpatty (Mumbai) or when holidaying in Goa. Thanawala, too, finds that pushing his body hones his mental agility. “I prefer individual sports where I can set goals for myself, but it is reading that I find most relaxing,” he says. He reads 12 books a year, and feels that this is one activity that helps him deal with the pressures of his job. “The best thing you can do is to forget the market when it is closed. It’s the only way you can survive.”

As he leaves his office, the phone rings. It’s his wife. She wants to know what their son can gift his best friend for his birthday. “Books,” says Thanawala, and he promises to purchase a voucher from a bookstore on his way home.