When “no trade” is the best trade.
When it comes to derivatives and risk management, there is one crucial piece of advice that is often neglected. After spending over a decade working on the trading floors of Goldman Sachs in Paris and London, alongside some of the best traders in the world, one piece of advice I learned was as follows:
No Trade Is A Trade.
Yes, you heard it right: Actually not trading is a very important decision. In the context of professional traders, people who need to transact to generate a profit and make a living, over-trading is considered as one of the capital sins, alongside doubling down on losing positions instead of cutting losses, or taking profits too early on winning positions.
So, yes, deciding ‘not to trade’ is a very important, and often profitable decision. My last trading boss at Goldman Sachs had a unique trading style. He would spend most of his time studying the markets and deciding not to trade. And a few times a year, he would decide that the balance of risks relative to rewards was so skewed that he felt ‘forced to trade’. And at that point in time, he would commit a hugely disproportionate amount of capital to the trade, and along with it, his hard-earned reputation and credibility.
So why is this relevant to this article’s discussion about Derivatives Markets and Risk Management?
Well, I am inclined to believe that many professionals working in the industry have failed to perfect the art of ‘not trading’.
Having worked with many treasurers, CFOs and risk managers over the last 26 years, many do not realize that by not trading, they may have taken a huge decision, a decision which may make or cost their companies millions of dollars.
Yes, choosing not to trade is a trade, even for the corporate treasurer.
Let us take a few examples:
Your company borrows from the bank at a floating rate for five years. You enjoy the low interest rates and wait for the loan to mature to refinance it.
Your company is buying raw materials which will be delivered over the next three years at the prevailing market price
Again: No Trade is a Big Trade!
What transpires from these examples is an underlying question about the role and responsibilities of the corporate treasurer or risk manager. This is actually a question of corporate governance, and raises some interesting points:
So, remember ‘no trade is a trade’ – a very crucial decision that is just as important as the decision to trade. It can turn out to be as lucrative or unprofitable as a trade itself. Remember to apply it effectively in your organization to minimize risk wherever possible.
December 8, 2019
CEO at Awad Capital