Trend Followers and Macro Traders

In late 1983 a Chicago futures trader placed classified advertisements for trainees. Richard Dennis had turned a $400 stake in 1970 into a fortune large enough to make him a national figure among traders, and he and his partner William Eckhardt disagreed about whether trading could be taught. Dennis thought it could; Eckhardt thought it depended on talent that could not be transferred. The often-told version with a cash wager is a dramatisation; the argument, by the account of the programme's own chronicler, had no money on it. The advertisements reportedly cost about $15,000 and drew more than 1,000 applicants (secondary). About 23 were chosen, 21 men and two women in most accounts, trained for about two weeks in December 1983 and given accounts of Dennis's own money to trade with a mechanical breakout system. Dennis called them "Turtles", after a turtle farm he had seen in Singapore (companion's profile of the Turtle Traders).

Nine years later, on Wednesday 16 September 1992, a different kind of trader tested a different proposition. The United Kingdom had entered the European Exchange Rate Mechanism on 8 October 1990 at a central rate of 2.95 Deutsche Marks to the pound, with sterling allowed to move 6% either side. Stanley Druckenmiller, lead portfolio manager of George Soros's Quantum Fund, had concluded that Britain, in recession, could not keep its interest rates as high as a Germany fighting post-reunification inflation, so the peg would break. By that Wednesday Quantum had sold more than $10 billion of sterling short, mainly against the Deutsche Mark. At about 10:30 in the morning the government raised its base rate from 10% to 12%, and later promised 15%, a rise that never took effect; at about 7 in the evening the Chancellor announced that sterling would leave the mechanism. Quantum's profit is usually given as about $1 billion; $1.8 billion and "over £1 billion" are also reported, and none is audited. The UK Treasury's estimated cost was £3.3 billion (2005 revision) (companion's profiles of Soros Fund Management and Duquesne).

The two stories mark the two traditions of this chapter. The Turtles were taught a rule that anyone could write on a card: buy the breakout, size by volatility, cut losers, let winners run, in every liquid futures market at once. Quantum's trade was a judgement that only a few people would have made and fewer would have sized as Druckenmiller and Soros did: one view, several times the fund's capital, with the downside capped by the peg itself. Both traditions make their money from large, persistent moves in futures, currencies and bonds, and both deliver it in lumps. They differ on where the edge lives, in a system or in a person, and so on what can be bought, copied and checked.