Risk | Jacob Bursell


Published in: 2016

Bokus | Goodreads

Pan Capital, with its thirty employees, could do up to half a million transactions a day. By the spring of 2000, the Swedish trading firm had been trading profitably for 90 consecutive months. Since the first day in the spring of 1998, they had turned Erik Penser’s loan of SEK 50 million into more than SEK 3.5 billion in profits, and along the journey become one of Goldman Sachs’ largest customers in the world. Risk is the story of how a few bank-employed traders through trial-and-error revolutionized the global electronic stock trading.

1970s – THE STOCK MARKET AWAKENS. In Sweden, the stock market had been in decline since the 1930s and for decades politicians had regulated the market. Interest rates were set centrally and foreign transactions in securities were prohibited. Shares and bonds were mainly controlled by banks and insurance companies. In the early 1970s, however, everything changed. Bretton Woods, the international currency cooperation, was dismantled and fixed exchange rates were replaced by variable ones. The price of oil rose 20x, inflation exploded, and interest rates skyrocketed. An entire register of new instruments appeared on the stock exchanges: Derivatives (options, futures, options on futures and interest rate swaps).

1980s – DEREGULATION. When Reagan and Thatcher entered the stage, new ideas sipped over to Sweden. Equity fund savings were subsidized, the market was deregulated, and the entire “folk home” floated in a national speculative acid. The money market was born, then the futures and options markets, and after a couple of years of financial liberation, everything ended in the crash of the 1990s.

THE WORLD IS OPENING UP. While Europe and North America opened up, Latin America, Asia and Africa remained white spots on the financial map. In Thailand, foreigners were prevented from owning more than 49% of the country’s listed companies and in Chile 25%. Countries such as South Korea, India, China and Taiwan were in practice completely closed to international capital. But in the late 1980s, emerging markets began to gradually open up. Malaysia opened in 1988, Argentina and Mexico in 1989, Brazil in 1991, India and South Korea in 1992.

1990s – CRISIS AND DIGITIZING. In 1990, the Stockholm Stock Exchange crashed, and banks, municipalities and insurance companies lost billions. The unions collapsed, people in finance were despised, and half of the securities market sought exile in London. In the early 1990s, the market functioned virtually like any industry before industrialization. Doing something on a large scale required a large crew. Transaction lists were printed at the end of each trading day and ticked off by hand, line by line. But during the decade, the financial world would go through a digitization process.

STOCK EXCHANGES GETS INCORPORATED. A few years into the 1990s, the Stockholm Stock Exchange became the first in the world to be incorporated and privatized. The former ownerless club was transformed into a limited liability company whose shares were distributed among the brokerage houses. This was the beginning of a wave that swept through the entire industry. The Helsinki Stock Exchange was privatized in 1995, Copenhagen in 1996, Amsterdam and Rome in 1997 and Australia in 1998. Singapore, London, Hong Kong, Frankfurt and Paris followed in 2000.

PAN CAPITAL. Pan Capital was started in 1998 by Pär Sandå, who was head of trading at Swedbank, together with friends Henrik Hedman and Claes-Henrik Julander. After a short time with Hagströmer and Qviberg, at the investment company Öresund, they started their own venture. Erik Penser contributed start-up capital and the first financial statements showed a profit of SEK 20 million. Ten years later, the company’s profit was SEK 1.4 billion.

FINDS EDGE THROUGH EXCEL AND VB. In the summer of 2001, Pan Capital had created a program in Visual Basic which, via a standard spreadsheet in excel, enabled a trader to do instant transactions with the keyboard that had previously taken seconds. The program was named TT, or “Toktradern” (the crazy trader), and would give the company a big advantage over slower market players. This would in the next decade lead to the company placing computers physically close to the world stock exchanges – then they got a few millisecond lead over the competitors. Later proprietary software kept track of which markets were open and closed, downloaded prices of thousands of stocks and currencies, and presented the information to traders in real time. Goldman Sachs wanted to buy the system without understanding that it was a home build in Visual Basic.

REPEATED BACKTESTS. Pan Capital had wondered whether it was possible to predict stock market movements by studying bar charts, moving averages and other indicators. They tested new strategies by letting computers process old stock quotes through the nights, and then in the mornings studied the results. They could then see that a strategy gave x% in return, made some adjustments, drove another night, and had hopefully added some percentage points.

TRIAL & ERROR. Faced with everyday-, or more serious problems, Sandå and Julander quickly tested a solution without thinking too much, they called it “iteration”. And so they continued non-stop, every day, with the ambition to constantly make the business a little better. “Anyone can iterate! Should I choose A or B? I’m taking B! As long as I do not die on the road, I will constantly push myself a little forward. We always started by losing money fast, within five seconds. And then when we had lost some money, we investigated what had happened. “

AUTOMATE ADMINISTRATION. Pan Capital constantly worked towards understanding the smallest components of the market and streamlined its internal systems. As they increasingly sent capital back and forth between time zones, they began to methodically automate every little dimension of the company’s administrative work.

A FOCUS ON COSTS. Pan Capital was built according to the principle that expenses should be avoided. A newly hired IT technician recalled that “everything was built with stuff you find at ordinary people’s homes, and then they could sometimes do over 1% of the deals on the New York Stock Exchange.”

THE FINANCIAL CRISIS – AN EASY VICTORY. When the smoke dissipated after the financial crisis, Pan Capital had made more than SEK 4 billion in profits. Not by daring to invest everything in one risky stock, but by piece by piece, day by day, dismantling the international stock market in its smallest components.

FLY UNDER THE RADAR. Not “being someone” in the financial industry has both advantages and disadvantages. Among the disadvantages is the difficulty of gaining a hearing for their ideas, especially among the banks whose main task had been to maintain existing structures. Among the advantages, which far outweigh the disadvantages, is the privilege of being able to get away in peace, without the attention of the outside world.

DO NOT HAVE SO MUCH RESPECT FOR SUCCESS. Sandå and his friends were more interested in the game than maximizing earnings by transforming the business into a highly profitable hedge fund. He had also studied the process – the way in which you become good at something. Asking questions to people who were good at something eventually became the working method within Pan Capital. “We who did this are not so insanely smart, we can probably prove it any day. It was rather trial-and-error. People do not believe it, because they have so much respect for success and money that they assume that you have to be very smart. But it’s more about a passion. ”

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