Churning profits, one 'pip' at a time.

TRADER Lan Yee Chan was not having a good morning. As she trained her eyes last week on a large computer screen that flickered on the foreign exchange desk of Union Bank of California, she noticed the Australian dollar had moved upward some 30 "pips."

A single "pip" represents only a fraction of a penny (technically, one 10,000th of any unit of currency), but when millions of dollars of currency are bought or sold, that can mean considerable losses or gains.

The veteran trader had been thinking about going long, or buying, the Aussie dollar, but decided not to. Now she realized she had lost the chance to make some $3,000 for the bank. And that followed a $1 million trade earlier in the morning on the Canadian dollar that lost nearly $2,000.

"It's not my lucky day," said Chan, the bank's chief foreign currency trader, who quickly moved on from her loss. "How you measure a trader is how you handle a bad position."

Such is life on L.A.'s largest foreign exchange desk, where $50 million in euros, yen, and other major foreign currencies are traded each business day, amounting to $12 billion annually.

Traders manage the bank's foreign currency positions, but most of the action is driven by the commercial customers--including exporters seeking to repatriate foreign currency profits into dollars, and importers who need to convert dollars into foreign currency to make purchases abroad.

While the traders rely on reports, formulas and news developments to make profitable trades, foreign exchange is a market in which split-second human judgment plays a big role.

"The market is the driver and normally it takes three to five years to get any significant experience to know the market," said Jim Griffin, a bank vice president who co-manages the desk. "It's pretty much learning on the job."

Not so noisy

Forget about the typical ruckus of a financial trading floor--the foreign exchange desk, located on the 11th floor of Union Bank's local offices on Figueroa Street, is almost sedate, with traders talking in low tones, whether on headsets or to each other.

Nearly two dozen currency traders sit in a row, facing each other in a long open room that also houses Union Bank traders working in other markets. Some have as many as four computer screens circling their desk.

Every so often, the silence is broken as a trader shouts the name of a currency and an amount to be bought or sold and is answered by another trader who quickly yells "Done!" That's the heart of the system.

The foreign exchange desk is actually composed of two sets of traders: "corporate traders," who make offers to customers to buy or sell foreign currency at specific prices, and "interbank traders," who then cover those positions by buying and selling the currency from other large commercial banks.

The two types of traders work together to make money on the spread--the difference between the prices quoted to corporate customers and prices obtained in the interbank market.

Once an interbank trader yells "Done," it is his or her responsibility to make a trade that covers the transaction that the corporate trader has just made with a bank customer- hopefully at a profit.

The trading room is largely populated by men and women in their early to late 30s, an age range that reflects the reality of the profession: a high pressure business that takes several years to learn, but which can often become too much for someone past 45 or 50.

Traders make far more money in New York, where the volume of trade in a big foreign exchange house can exceed what is traded at Union Bank by a factor of 10. Still, experienced Los Angeles traders can make more than six figures in base pay and incentives, while junior traders right out of school can make around $50,000. "You develop certain insights by working the market over time. There is no Forex school or Forex degree," Griffin said.

Despite her vice president title, Chan, who has two adult children, trades all day and jokes that by now she should be in some management job. But she loves the work.

Bernard Tsui, a 39-year-old corporate trader who helps manage the desk and often completes deals with 20 to 30 customers each day, recognizes the full-time nature of the job, since the foreign exchange market operates day and night all over the world. He checks currency rates five or six times an evening when he is at his South Pasadena home. "My wife understands the nature of the business," he said.

Trading was slow last Tuesday as both traders and customers waited for a Federal Reserve Board announcement regarding interest rates. Any big move upward would raise the price of the dollar more than anticipated--the kind of volatility that can turn off cautious bank traders from making big bets on currencies. (As it turned out, the board raised rates a quarter percent, as expected, with little effect on the market.)

Tsui had just completed a trade with a clothing manufacturer that owns a Japanese subsidiary. The company wanted to repatriate $5 million worth of profits that it was holding in yen, necessitating a conversion.

Tsui sold the yen at a price he said would satisfy the customer, while also allowing the bank to earn a profit: "Something to make her happy, something to make me happy." (To settle any disagreements, all calls at the trading desk are recorded and kept for six months.)He wouldn't say what the price was.

Like other traders, Tsui keeps watch on his computer screen, which tracks the amounts banks around the world are offering to buy and sell various currencies, usually as measured against the dollar.

Using that information, as well as his knowledge of the market, economic news and the size of the transaction and customer, Tsui makes his call. The banks take no transaction fee; all its profits are in the spread.

The smaller the transaction, the higher the spread. The bigger the transaction the smaller the spread--with some Fortune 100 customers with other business at the bank paying no spread at all, since the bank makes significant money charging them for other services. "'Our job is to understand the whole package, and come up with the final pricing," said Tsui.

Completing the deal

The spread isn't locked in until the transaction is completed by the interbank traders--a job that requires the stomach to buy and sell millions of dollars of foreign currency at one time.

Most of their time is spent on the "spot" market, buying and selling currency in real time throughout the day. Interbank traders also deal in more sophisticated "forward" transactions, in which foreign currency is bought and sold at a future date, and hedging transactions that lock in future prices.

It's a daunting process. The Reuters screen in front of Chan flickers constantly, with the bid and ask price of major currencies changing every few seconds, or sometimes even several times a second.

But like other interbank traders, Chan rarely seems hurried, except when she's in the middle of one of her several dozen trades each day. A few years ago, she did most of her trading with other banks on the telephone. Today she prefers e-mail. "I can keep a hard copy of it," she said.

There's another reason for the relatively relaxed attitude. While the corporate traders may be making scores of deals each day, it's not necessary for Chan and other interbank traders to respond to each one.

Unless it's a big transaction, they will often tally up how much the bank needs to buy or sell a specific currency and then make a single trade that will cover a number of the corporate deals at once.

While Chan may immediately make a trade, he also may wait if she thinks the currency is heading in one direction or another and the bank can make more money minutes or even hours later.

Chart also will trade ahead of any customer transactions. That's how she lost money last week on her $1 million purchase of Canadian dollars, which is her main trading currency. She thought the currency was heading up, but instead it dropped far below expectations.

Still, she lost less than $2,000 on the trade. That's a reflection of both the bank's cautious stop-loss policy and Chan's trading habits. The bank's foreign exchange desk is there largely to service customers, not rack up huge profits speculating.

And while Chan acknowledges getting a thrill making money, she adds that she has lasted 28 years in the business because of her restraint. "I think I have good discipline," she said. "I never get myself in big trouble."