A British Pounding: How George Soros Made Over $1 Billion Betting Against The Bank Of England

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Few asset managers in history can say they've made $1 billion in a single trade, let alone a trade that took less than six weeks to execute. However, European financier George Soros can stake a claim in that elite group thanks to his massive currency bet against the British pound in the early 1990s. Not only did the trade net Soros a score over $1 billion, but it earned him reverence across the financial sector as one of the boldest managers, and client funds soon swooped in at a record rate. Here's the story about how Soros took on the Bank of England and won.

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Banking on Boom and Bust

Soros started his international trading career in 1954 at the arbitrage desk of London's Singer & Friedlander before moving to New York to take a similar job for the father of a former co-worker. He bounced around Wall Street for over a decade before launching Soros Fund Management and coining his classic theory of reflexivity in markets.

Reflexivity states that markets move not on economic fundamentals but on the flawed ideas of human participants. Fallible participants create feedback loops, which is why boom and bust cycles are often more volatile than economic literature suggests. Soros would use this thesis significantly when placing his bet against the British pound sterling in 1992.

Britain's Black Wednesday

In the early 1990s, Soros began stockpiling his massive bet against the British pound. In 1990, England entered Europe's exchange rate mechanism (ECR), which was a system for valuing the various currencies of Europe against each other. Immediately, Soros noticed the opportunity. In his estimation, the pound was valued much too high on the ECR, and inflation in the U.K. was crushing asset prices. In his view, the Bank of England had two choices — raise interest rates or float the currency. 

One problem the Bank of England had was that the ECR made adjusting rates difficult, so Soros decided to place his bet. Here's how he manufactured his trade: He bought German marks while selling British pounds on the forex market, going long on one of Europe's strongest currencies while shorting the one primed for weakness. While pressure on the Bank of England mounted, Soros began laying the hammer, upping his bet and shorting $10 billion worth of pounds sterling. 

On Sept. 16, 1992, the Bank of England finally unraveled. After jacking up interest rates and pumping in cash with little effect, the pound reached a new low against the mark, and the Bank of England was forced to exit the European ECR after less than three years of membership and devalue the pound sterling. The pound would once again float freely against other European currencies, and Soros's trade produced one of the biggest wins in market history at an estimated $1.5 billion in profit. Not only did Soros's personal wealth skyrocket, but his firm was now known as a major player in currency markets and the size of Soros Fund Management's assets saw tremendous growth.

Soros’s trading rules and stories have become required reading for prop traders in all markets and asset classes. If you want to test your market theories, prop trading firms like The 5%ers offer a boot camp-style program where prospective traders can access $25,000 in capital for a flat $95 fee. The better you perform, the further you'll move up the ladder and the higher percentage of profits you'll keep. Click here to learn more about the 5%ers' Bootcamp program.

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