Cosmopolis Trading Explained

23 Jan

By Lurker

In the novel Cosmopolis by Don DeLillo, the main character Eric Packer is a whiz at currency trading. Currency trading is fairly unknown to the average consumer and perusing book commentary most readers are confused by the jargon referenced in the story. However, reading the story as someone who has some knowledge of the currency markets and trading, there are some clues dropped in by the author. These clues provide us insight into the specific type of currency trading that lead the Eric Packer’s downfall.  This article is an attempt to provide readers the basics of the financial back story. Hopefully enabling the reader a view into the mindset of the character Eric Packer. Let’s begin with the basics of the New York Stock exchange and trading stock. We will then relate those concepts to trading currency. Lastly, illustrating these concepts using specific lines from the novel.

There are several markets around the world that trade stocks. Stocks are instruments of public companies, known as stock certificates and the price or value of these instruments fluctuates daily. For example, the New York Stock Exchange (NYSE) is the most widely known, besides the NASDAQ which are based in New York City. However, there are other stock markets around the world, for example the Nikkei (Japan), FTSE (UK), Hang Seng (Hong Kong). The basic concepts of stock trading are to buy and sell shares of companies. The stock shares are usually bartered on the floor of the exchange where the prices are set by those who wish to sell and those who are buying. The concepts of supply and demand apply here, where there is higher demand for a stock the seller can charge a higher price. At it’s most basic, it’s sellers and buyers exchanging ownership of stock certificates.

Most readers understand the concepts of currencies and each country having their own money. If you’ve ever traveled to another country you may have exchanged your own country’s currency for the currency of the country of your destination. When you exchange your currency there is always a stated exchange rate. These rates are the value of the currency against another currency and like stocks, these prices fluctuate daily. World currencies, just like stocks are traded on an exchange called the ForEx[1], short for foreign exchange.

Now, trading currencies has no real protection or regulations like the stock market (SEC)[2]. The ForEx is basically gambling like placing bets in a casino. You place a ‘bet’ on which way the price of the currency will move. This is where Eric Packer is obsessed with patterns. There are distinct trading histories and patterns that help in predicting which way the currency price will move. If your gamble is right, you make money.

Within the concept of trading both currencies and stocks, there is a system where you can ‘borrow’ the money to trade, you can trade on credit. In the stock world these are called margin accounts. In the currency world, it’s called a ‘carry trade’. Within the story Cosmopolis, when Packer and Chin are conversing in the limo, Chin alludes to this concept. On page 10 Chin replies to Packer “…we are borrowing enormous sums…”

All currencies are traded in pre-set pairs on the ForEx. In the book we are made aware almost from the first pages that Eric Packer is gambling on the Japanese Yen. However, we do not know what pair he is trading with until his conversation with Jane Melman on page 21 Jane indicates it is with the US dollar. This is a  common trade pair USD/JPY on the foreign exchange.

Consider walking up to a teller window at a casino and asking to borrow $1,000 before you place a bet. Like any loan, you have to agree to a repayment ‘interest rate’. However, with a ‘carry trade’ the interest rate isn’t final until the end of the market day. This leaves a gamble if you bet the wrong way, not only do you loose the $1,000 you borrowed but you have an undetermined amount of interest to repay.  On page 19, Jane Melman indicates to Eric Packer the same “…we have a yen carry that could crush us in hours…”. Additionally, the gamble that Eric Packer makes is dependent upon this fluctuating interest rate that his bet is will remain the same. On Page 18, Jane Melman expresses to Eric Packer that the interest rate was left unchanged. In the final exchange between Eric and Jane, on page 21, they indicate which way they place their bet. “the dollar will settle up…the yen will drop”.

This is the basis of the gamble that is the back story surrounding Cosmopolis. Not only does Eric make the gamble and loose on the bet, he looses because he borrowed more money than he could repay with the decisions he made against the yen.

For further information on ‘carry trade’ please consider another example outlined here.  http://www.investopedia.com/terms/c/currencycarrytrade.asp

Please join our discussion: Monday January 24st, 7:00pm EST.


[2] SEC – Securities and Exchange Commission

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76 Responses to “Cosmopolis Trading Explained”

  1. Open Book January 24, 2011 at 3:41 PM #

    This is a wonderful article. I was fascinated by this character’s obsession with prime numbers in this novel. He lives in a eighty nine stories high rise building, the first women he sleeps with in the novel is forty seven. Do u think Eric put more faith in natural numbers than in people or reason? What do u think about his prime number philosophy? Do u think this is what may have led to his downfall?

    • Lurker January 24, 2011 at 7:06 PM #

      Eric is a victim of his own success. He couldn’t imagine a scenario where he would fail. He reliance on prime numbers allowed him not search for patterns. Prime numbers are only divisible by themselves. For Eric, always looking for patterns, prime numbers could provide a sense of security.

      I think Eric’s age also factors in his ability to not take the advise of his trusted advisors. However, Eric also proceeds with a gamble without knowing the pattern. His own insistence and pressure to ‘find it’ he delegates to Chin.

      • Open Book January 24, 2011 at 7:22 PM #

        I think that’s what makes the story interesting. It’s not very predictable. As the reader u have certain expectations of the character, story etc…. It really catches u off guard.

        What did u like most about this story?

        Do u think it depicted this time period well?

        • Lurker January 24, 2011 at 7:31 PM #

          I think it depicted the craziness of that time period… of the market, the ‘over confidence’ that was running rampant, he dot.com bubble. All of that.

          I liked the surprise ending, although I think on film, there might be clues better placed. Some of the story might be told via the visual elements that you seem to overlook when reading.

          • Open Book January 24, 2011 at 7:41 PM #

            Yes! There’s all kinds of visual clues a film could leave that a book really can’t. This is what makes this book great to adapt.

            • Lurker January 24, 2011 at 7:48 PM #

              There was some comments that I read elsewhere that this style is typical of DeLillo’s. I haven’t read any of this other novels. Is that a fair assessment?

              • Open Book January 24, 2011 at 7:57 PM #

                Yes! I read that as well. I have not read any of his other works but I’m curious to do so now.

                In fact when reading this book I thought it would be great if it was adapted to a non-linear structure for the film.

                • Lurker January 24, 2011 at 8:06 PM #

                  That would be an interesting idea. The book is sort of scrambled (IMO) from a structure perspective and there are really two stories going on anyway. It would be nice if they could find a way to blend them.

  2. ozzie20 January 24, 2011 at 3:44 PM #

    I’m commenting earlier incase I forget to come back again! 🙂

    So to see if I understand this correctly I’m comparing it to modern history. The patterns in the book are like the ones financial experts used to predict the current ressesion a few years before it actually happened? I haven’t finished the book yet (I’ve just past the conversation between Eric and Jane quoted above)but I assume Eric ignores the warnings like bankers did a few years ago. Like them, he hadn’t lost that much before and believed he knew better. The warnings were ignored but market did crash. He not only lost the money he did have but also the money he loaned and bet on. He had nothing to repay that loan back either. Is this right?

    • Lurker January 24, 2011 at 4:24 PM #

      Ozzie, great correlation to current events! Yes, Eric ignores the advise. And Yes, he looses everything and then some! We assume based on his past trading history he would have leveraged these loans with some type of collateral. However the story never flushes that part out so we can only assume.

      • ozzie20 January 24, 2011 at 7:22 PM #

        Double woo hoo! I remembered to come back and I understood what you wrote. Great postby the way. It explained some things to me, like margin accounts. I never would of known or understood that. Thank you!

        • Lurker January 24, 2011 at 7:32 PM #

          YEAH! I’m glad that some of the elements of the story make more sense.

    • Kim January 27, 2011 at 1:41 PM #

      I don’t know what genre this book is under but I’m taking it as Sci Fi, just because these type of books the authors are trying to get their audience to see what will happen if the world goes in a certain direction such as through science, psychology, or even financial (such as this book).

      So basically this book by Don Delillo is or was warning his readers that if we don’t change the way we handle not only the financial matters of the world, but also how society develops that we will be in a world of sameness. At least that is what I am getting.

  3. Parisienne January 24, 2011 at 5:49 PM #

    Hi Ladies!

    Interesting article! I haven’t read the book yet but its on my list.

    • Lurker January 24, 2011 at 6:59 PM #

      Oh no! Hopefully we won’t spoil the story for you!

      • ozzie20 January 24, 2011 at 7:26 PM #

        I’ve only read a quarter of the book (actually just got past Eric and Jane’s conversation) and it hasn’t spoiled anything. If I remember correctly the quotes are from the first quarter of the book!

        • Open Book January 24, 2011 at 7:30 PM #

          Hi Ozzie,

          Do u like the pacing of the book? Some have complained the book is hard to get through even though it’s a short novel.

          • ozzie20 January 24, 2011 at 8:14 PM #

            Well, I don’t know if it’s the kindle edition I have but it is a bit hard. Mostly because of the way it’s written not the story. It’s kind of hard to describe. It the topic switches quite fast and it’s hard to tell who is speaking. I find myself thinking “Woah, go back a sentense or two, it seems to have changed to a new place or conversation”. In a physical book form it maybe laid out differently. It just seems to run into each other rather than a clear cut paragraph.

            Maybe that is the intention of the author. It hieghtens the sense of confusion and the fast pace of life Eric lives.

            It’s the first book I’ve read on kindle so have nothing else to compare it to yet. So the story is fine, just the lay out.

            • Open Book January 24, 2011 at 8:23 PM #

              I read a book version.

              U are not imagining things. It’s written like a poem I thought. Everything seems to be one continuous thought pattern. LOL!! I did the same thing u did. I stop and start, go back and re-read it again. Very fascinating!!

              • Lurker January 24, 2011 at 8:32 PM #

                I did the same thing! Re-read to figure out who was really talking.

                • ozzie20 January 24, 2011 at 9:26 PM #

                  Oh good! I thought I may have got a bad version of it!

                  • lurkerm3 January 25, 2011 at 9:02 AM #

                    No! The break points aren’t clear and if you’re a fast reader it makes for some confusion!

                    • ozzie20 January 25, 2011 at 6:19 PM #

                      Ah! Yes, I do tend to speed read. I’ll try and slow myself down when I pick it up next.

                    • Kim January 27, 2011 at 1:44 PM #

                      Yes miss speedy, here kept wondering why it took me so long to read. I took my time with this one just because of the way it was written.

  4. Lurker January 24, 2011 at 7:37 PM #

    Did anyone have any specific questions on the article that they didn’t understand?

    • Open Book January 24, 2011 at 7:49 PM #

      Could u elaborate more on the interest rate Eric Packer placed on the Yen and the dollar or “carry trade”?

      • Lurker January 24, 2011 at 7:54 PM #

        Sure! So the principal is that you leverage the currency which has a lower interest rate. These rates are determined by the country’s monetary body. In the United States this is the Federal Reserve bank. The FED determines the base rates for lending. The rates are typically used when commercial banks make loans to each other. The idea with the carry trade is that you want to pick a trading pair where the currency has a very low interest rate. Therefore making the risk low for a carry trade.

        • Open Book January 24, 2011 at 8:04 PM #

          U indicated in your article; “we do not know what pair he is trading with until his conversation with Jane Melman on page 21 Jane indicates it is with the US dollar. This is a common trade pair USD/JPY on the foreign exchange.”

          Why is the USD/JPY a common trade pair on the ForEx?

          • Lurker January 24, 2011 at 8:12 PM #

            Two very large economies – US and Japan. This makes investors(banks) want to buy and hold these currencies on their books. Generally very large, commercial banks hold many currencies on their balance sheets. They can perform currency exchanges internally and not sell them on the open market.

            • Open Book January 24, 2011 at 8:17 PM #

              Gotcha!! Makes sense….

              • Lurker January 24, 2011 at 8:27 PM #

                The largest pair is the Euro/USD. The EuroZone money and the USD are very large. Lot of money changing hands each day. The next one we all hear about is China! The Yuan is the next big currency we will be hearing about in relation to the USD. Big big economies.

      • Lurker January 24, 2011 at 7:58 PM #

        I’d have to go back to the historical trends to see where those rates were to get a baseline. The rates aren’t really important to the story. However the underlying context is that interest rate is a factor in a carry trade which is what Jane Melman was trying to elaborate. She called an ‘insider’ in Japan and found out that the national bank in Japan was leaving interest rates unchanged.

        • Open Book January 24, 2011 at 8:13 PM #

          No, I understand what u are saying. U did a great job explaining it to me.

          I would imagine u have to be a trading historian to trade stocks and know the trading laws of different countries etc….Is that true?

          • Lurker January 24, 2011 at 8:23 PM #

            I think the biggest thing is that you learn that there are distinct trading patterns – and put computers to work for you. In the same vain that we see Eric Packer in the story – he’s watching the trending charts real time on his computer monitors. All of these things come into play with currency trading. Its definitely more of a pattern matching skill vs stock trading. In fact, all the currency ‘pattern names’ remind me of some of the elements that we learned in watching the movie The Da Vinci code. Where they are scrambling and unscrambling numbers and sequences! Finding repetitive patterns and being able predict when they will happen again, makes the ‘science’ of currency trading very appealing.

            • Open Book January 24, 2011 at 8:32 PM #

              Would u say it’s like predictive analysis?

              • Lurker January 24, 2011 at 8:33 PM #

                YES, in fact that’s exactly what I would call it.

            • ozzie20 January 24, 2011 at 9:06 PM #

              Actually, I was thinking along the same lines when it comes to Eric’s obsession with numbers.

              He seems to be quite philosophical and is probably interested in the philosophy of numbers. There is a line of thought that the fibonacci sequence can be found in the biological settings of living things. If Eric believes this to be true, then ultimately he thinks he can find the pattern to the stock markets and well, a key to life! Number are solid, predictable. They don’t change unless you impose yourself on them. He probably aware of the patterns of numbers in art, structures, nature etc. From what I read it wouldn’t surprise me if he surrounded himself in these things. This comforts him, he understands it, he’s mastered it. Ultimately it was his downfall too because although life maybe made up on these sequences on a basic element, human will does not. The mind isn’t governed by it. It’s not controlable. Eric tries to use the patterns to understand it but can’t. A few different moves by other traders can change these patterns into something he doesn’t understand especially if he’s never failed. In trying to find the answer in such a small element, he’s not noticed a greater element. The unpredictable nature of humans and that where he fails, I think.

              Hope it makes sense, it’s 2am here!

              • lurkerm3 January 25, 2011 at 9:11 AM #

                Wonderful point Ozzie!
                In fact, two of the trading patterns that the Forex recommends you learn are the Japanese Candlestick and the Fibonacci retracement! And you’re right, Eric references the patterns in tree rings and nature on page 80! So you are exactly right in drawing the correlation to fibonacci!

                • ozzie20 January 25, 2011 at 6:16 PM #

                  Cool, I may understand this book when I finished it better than I thought I would!

              • Open Book January 25, 2011 at 6:48 PM #

                Wow!! This is a great analysis Ozzie!! I believe Eric’s own free will should have been the first clue u can’t predict people. All day he kept doing things out of his normal routine and out of sequence.

  5. Lurker January 24, 2011 at 8:37 PM #

    For those of you who haven’t finished the book, I hope you come back and re-read the article and the comments!

  6. Open Book January 24, 2011 at 8:44 PM #

    Well I have really learned a great deal tonight. I know I have more questions regarding this topic. Can we continue the conversation tomorrow?

    If others are joining us have questions, please join in on the discussion!!

    • lurkerm3 January 24, 2011 at 8:53 PM #

      Yes you can post questions anytime!

  7. Open Book January 25, 2011 at 6:50 PM #

    Cosmopolis is sort of fantastic by having a hi-tech; security office on wheels, its plausible today but in the late nineties is questionable. Do u think they should change the time period and make it present day to account for this?

    • lurker January 25, 2011 at 7:05 PM #

      In the late 90’s (95-99) we had satellite uplinks everywhere for data. We didn’t have cell service for internet however, there was mobile wireless technology for people who had the money. You could move it forward for the flat panel TV’s. Technically, flat panel plasma’s tvs were floating around in 2000 -they were very expensive. But they existed. Our data center was covered in big TV’s. So, no I don’t think so.

      • Open Book January 25, 2011 at 7:12 PM #

        Actually, with a few creative liberties u could bring in some 2000 technology to really make it more fantastic.I see your point, I mean the late 90’s was all about over indulgence. So Eric having access to technology so advanced would show him as being very savvy.

        • lurker January 25, 2011 at 7:16 PM #

          There was technology for the very few who could afford it. Eric would have been one of those and on the cutting edge of technology given those around him and money not being a factor. Yes, you could bring it forward, I would think you might want to come forward to the dot.com bust in 2001. That might be be more of way to make the overindulgence and time period sync. Remember all the young kids that were involved in startups during this time period. There’s a correlation with Eric (28) and Chin and Shiner all being fresh out of college.

  8. Open Book January 25, 2011 at 7:14 PM #

    What interested u in writing about this topic?

    • lurker January 25, 2011 at 7:20 PM #

      I think its helpful to understand the financial aspects of what drove Eric Packer. I also think understanding what was going on helps to correlate what we see happening with his interactions with Benno. The jargon can become very confusing and I think there are pieces of the book that don’t make sense without the background.

      • Open Book January 25, 2011 at 7:26 PM #

        So true!!! Well this has been really helpful having it explained in such a clear and concise way. Given this is not my area of expertise. LOL!!! U have helped me understand the dynamics and process much better.

        • lurker January 25, 2011 at 7:35 PM #

          My opinion, I think there’s a risk of over analyzing this story from a literature perspective when you miss the underlying context. So I think having the grasp of ‘what he does’, ‘what he’s good at’, enables to reader to fully comprehend what the author wrote in the context of currency trading and his downfall. Plus, the idea of currency trading is not widely known and is confusing to many. So while my explanation is very simply stated, its still a high level of what goes on in the market today. Truthfully, Eric packer’s skills with finding numbers and patterns, had he not gotten into currency trading, likely would have landed a job at the CIA or FBI doing intelligence with crypto gear.

          • Open Book January 25, 2011 at 7:48 PM #

            Oh! I absolutely agree. It makes all the difference, I mean u can’t fully grasp the character or impact of his downfall without knowing about this world and what he does in it. So yes I agree with u….

  9. Open Book January 25, 2011 at 7:20 PM #

    Do u think Delillo unpredictable way of writing was somehow a clue for the reader how things were going to turn out for Eric?

    • lurker January 25, 2011 at 7:23 PM #

      I don’t think I can draw a conclusion because I have not read any other Delillo’s novels. I would be curious if this style of writing it typical for him or if this is just this style for this story.

      • Open Book January 25, 2011 at 7:29 PM #

        Yeah!! I have not read any of his other works as well. Others who have are sort of shocked and disappointed by this Novel because of the way it was written.

        • lurker January 25, 2011 at 7:37 PM #

          That tells me that it might have been intentional by the author. Although I think translated to a screenplay would eliminate a lot of the ‘transition’ issues I experienced when reading the book.

  10. Open Book January 25, 2011 at 7:37 PM #

    Spoiler Alert/Ozzie!!

    Eric does not know who he is. His turn towards technology is a way of escaping something in himself, a past that haunts him. Do u think in the end, the book is a story about a man losing his faith?

    • lurker January 25, 2011 at 7:42 PM #

      I think its about self doubt and loosing faith and confidence in your abilities and direction. Loosing your way..?

      • Open Book January 25, 2011 at 8:11 PM #

        After Eric has lost al his money. Do u think the person who is going to change Eric’s life forever her age is a prime number 41. Is history repeating itself for Eric?
        At least that’s what I thought…

  11. Open Book January 25, 2011 at 7:53 PM #

    Have u seen the movie sequel Wall Street?

    • lurker January 25, 2011 at 7:54 PM #

      No, I remember seeing the first movie – long time ago. Didn’t see the most current one.

      • Open Book January 25, 2011 at 8:03 PM #

        Well u did not miss much!!! However, I was going to ask u what u thought about the sub plot in that film? I thought it was very good but it was not set up very well and it could have made the film more substantial.

        • lurker January 25, 2011 at 8:10 PM #

          I’ll have to watch it and come back to discuss. I had a front line view as I worked for a financial services company during the start of that time period. So my view is likely jaded.

          • Open Book January 25, 2011 at 8:15 PM #

            Oh! So u could give the exact run-down without seeing the film!! I would love to discuss this film with and get your opinion and thoughts.

            • lurker January 25, 2011 at 8:22 PM #

              Likely I could sum it up for you without seeing the film. The story didn’t really draw me, I could picture myself yelling in the theater or yelling at the TV screen. Or at worst it raising my blood pressure from disgust!! (LOL)

              I’ll let you know when I see it!

              • Open Book January 25, 2011 at 8:29 PM #

                Yeah!! It was pretty disgusting to see. Maybe u should not see it. We saw it at home and we were yelling!!! I’m sure our neighbors could hear us and thought we were insane. LOL!!

  12. Open Book January 25, 2011 at 8:20 PM #

    Why does the Forex recommends you learn are the Japanese Candlestick and the Fibonacci retracement?

    • lurker January 25, 2011 at 8:26 PM #

      These are two of the patterns that re-appear in all the trends- the idea that you learn the ‘markers’ for the start of the pattern and you’ll be able to predict the outcome. This increases your chances to have a successful trade.
      There are some great tutorial videos on the FOREX website, and the FOREX website allows you to open demo accounts – where they give you play money. It’s an easy way to see if you’re grasping the markets without loosing your own money. These are kind of fun, if it’s something you want to learn.

      • Open Book January 25, 2011 at 8:35 PM #

        Oh! Play money!! I’m game. LOL!!

  13. Open Book January 25, 2011 at 8:41 PM #

    Lurker,

    I have to go!!

    However, this was a great article and very helpful in understanding Cosmopolis. I really think u can appreciate the story much better after knowing about Eric’s world of trading numbers and patterns etc….

    • lurker January 25, 2011 at 8:49 PM #

      Glad you found it informative!
      Have a great night!

  14. Open Book January 26, 2011 at 4:18 PM #

    Ozzie!!

    After u finish the book u must, tell us what u thought of the ending!!!!
    I hope we did not ruin the ending for u, we tried not to be very specific when commenting about the story, incase some people still have not read the book.

  15. Kim January 27, 2011 at 1:58 PM #

    Lurker very good article. I did learn a lot from your information. I kind of skipped over that in the book and concentrated on the personal story, which I believe was interwove with Eric’s passion with the financial part of his life.

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