There is an interesting article on business insider about George Soros stating that he did not break the pound.
A lot of people think that Soros has ungodly control of the currency and financial markets, but it just isn’t true. He even admitted it himself by saying:
“Although I believe the man who caused the bankruptcy of the Bank of England was not really [me]. Market was the one who did it.”
Even Soros knows that he cannot fight the market and global macro forces that can come into play. But, let us examine the situation further by asking the right trading questions.
We know that Soros shorted around $10 billion of pounds for that trade. He did this trade almost twenty years ago. Why hasn’t he broken the Bank of England again? He attacked some asian currencies in the late 90’s but since then he hasn’t “broken” another central bank. Why hasn’t he?
After all, if he can just place a $10 billion dollar trade and break a central bank, why doesn’t he do it every year, every month or every day? The answer is because he can’t. Soros knows about order flow, liquidity, and volatility.
Also, the central banks are not as active in the currency markets as they used to be back then. Soros can’t break the Bank of England, because they don’t intervene in the currency markets anymore. They still can in the future. But intervention is much more limited nowadays.
Soros knows that if he places a $10 billion dollar bet today let’s say, he may move the price 100-200 pips, but then what? He knows that you need further order flow to come in to validate your analysis.
You always have to ask the question – and then what happens? Where is the future order flow going to come from?
So, Soros could place a big bet any day he wants. But if he just places huge orders wildly, then he knows that once his huge orders get filled, the market may trip a whole bunch of stops, but if further order flow doesn’t come in to validate the trade, the trade can immediately start going against him.
Which is why, when he places a trade, along with other global macro traders, they need to have a good reason for doing so. They need to have the future order flow and market momentum on their side. They preferably want the global macro forces to validate their trade. If George Soros did not have the global macro order flow on his side during the Bank of England trade, then he would have not been successful.
He also wasn’t the only person making the same trade. Other hedge fund managers like Paul Tudor Jones and Bruce Kovner made the similar trade along with Soros, just in smaller size.
Soros knows that when you place a big trade, you need the market to be volatile and explode with momentum. And you need to have a good reason for the market to move. A moving average crossover or chart pattern just doesn’t cut it. Hedge fund managers don’t place billion dollar trades based on technical analysis. They do so based on global macro analysis.
I am not saying they don’t look at charts. Many of them do. But that is not where they spend the majority of their time on. They spend the majority of their time analyzing the information that does not appear on the chart.
Even if George Soros did not participate in the shorting of the British Pound, the huge drop in the British Pound during fall of 1992 would have still happened. There would have been other market participants that came in to sell a few billion and deplete the Bank of England reserves. It was going to happen eventually. Soros just made it happen a few days or weeks earlier than it otherwise would have, and profited handsomely for it.
And that is the truth. The order flow truth.