The story below sounds like something out of the Michael Lewis book "Liar's Poker," which described his days as a bond salesman for Saloman Brothers. That was in 1986 and the bond market was in the midst of a transition that changed the way bonds were traded. As a result of the changes, some people made an awful lot of money during those times.

Financial markets are experiencing similar changes and turmoil with the development of derivatives trading and once again, some people are making an awful lot of money.

Here's a story from yesterday's Wall Street Journal describing Michael Spencer's rise to lead a derivatives trading house.

An Arcane Corner of FinanceCreates a London Billionaire
Mr. Spencer Builds an EmpireAs Derivatives Broker;Big Exchanges Move In
A £1,000 Bet on His Shoes
By DAVID REILLYJune 8, 2006; Page A1
LONDON -- As a young broker in London in the early 1980s, Michael Spencer was fired from one job for making a bad bet on gold and another for trying to hide losses on futures contracts.
His career in tatters, he scraped together $60,000 with three partners to play another hunch: There was money to be made acting as middleman between big banks trading complex financial instruments. That wager has turned Mr. Spencer into one of Britain's richest men.
As more banks, corporations, and big investors began using derivatives to hedge risk, Mr. Spencer, 51 years old, built his company, ICAP PLC, into a derivatives-industry giant. Today, ICAP is one of the world's largest brokers of the complex financial instruments. Mr. Spencer's stake in the publicly traded company is valued at about $1.1 billion.
Now, big change is sweeping through this arcane corner of the financial markets. Operators of traditional stock and commodities exchanges -- many of them newly public companies -- are searching for new sources of revenue, and the booming derivatives market looks like fertile ground.
The planned merger of NYSE Group Inc. and European exchange operator Euronext NV would give the New York Stock Exchange access to Euronext's derivatives-exchange business, an area Big Board Chief Executive John Thain has identified as a priority. The Chicago Mercantile Exchange Inc. has formed a joint venture with Reuters Group PLC to trade currency derivatives, a move that will bring it into direct competition with ICAP. Nasdaq Stock Market Inc. is also looking toward ICAP's domain. Exchanges can often charge higher fees for trading derivatives than for stocks, for which investors now have a host of low-cost alternatives.
This rapid consolidation is pushing Mr. Spencer toward the point where he must eat or be eaten. "What we do now," Mr. Spencer said in an interview late last year, will determine whether ICAP is "a shark" or "a big fat tuna." He is beefing up ICAP's electronic-trading capabilities and aims to eventually generate more than half of ICAP's profits through such trading. In April, ICAP beat out Nasdaq and others to purchase, for $825 million, EBS Group Ltd., which competes with Reuters and has a large electronic system for trading currencies.
Mr. Spencer predicts that the coming years could be turbulent ones for the derivatives industry. Either specialty brokers like ICAP will combine with mainstream exchanges to form "superpower global exchanges," he says, or there will be "a clash of Goliaths."
Over the years, Mr. Spencer has shown a stomach for risk. In his freewheeling workplace, he and his employees have bet on card games and sporting events. He sometimes said to colleagues: "Don't look down. A thousand pounds. Am I wearing lace-up or slip-on shoes?" Some took the bet. The stupidest wager he ever made, he says, was when he lost about $65,000 betting on the value of a runway model's jewelry. He says he eventually set up an in-house book to keep track of everyone's wins and losses, which were settled monthly on payday. Mr. Spencer says he no longer makes such bets.
ICAP's core product is derivatives, financial instruments whose values are tied to the performance of assets such as individual stocks and bonds, or to benchmarks such as interest rates. Investors use them to hedge risk. An investor can buy a derivative, for example, to neutralize the effects of rising interest rates or fuel prices, of declining bond values, of swings in the price of a commodity like corn, even of the effect of weather on crops.
Plain-vanilla derivatives such as futures -- agreements to buy or sell a specific commodity or financial instrument at a set price on a stipulated date -- now trade electronically on commodities exchanges such as the Chicago Merc. Prices are available for all to see. Electronic trading is more profitable for companies that arrange trades because commissions don't have to be paid to brokers.
Mr. Spencer has long specialized in the kind of complex products that electronic-trading systems are currently ill-suited to handle. These more-exotic derivatives are traded over-the-counter by ICAP and other inter-dealer brokers. Working the phones, they arrange trades between large banks and other institutional customers who are interested, say, in hedging their interest-rate risk. Prices aren't openly displayed; they are worked out by brokers. Buyers and sellers often don't know one another's identity. This market is unregulated, and often opaque, making it difficult for regulators to gauge the risks buyers and sellers are taking on and the protections they have against financial-market shocks.
The over-the-counter market is far larger than the exchange-traded one. Derivatives traded in this market had a total face value of about $285 trillion at the end of 2005, up from about $94 trillion five years before, according to the Bank for International Settlements, an association of central banks based in Switzerland. (The face value represents the value of the underlying instruments on which the derivative is written.) In comparison, exchange-traded derivatives had a total face value of about $58 trillion at year-end, according to the bank group.
The products that firms like ICAP trade "are almost like custom-tailored suits," says Michael Pagano, a professor at Villanova University College of Commerce and Finance. "For years, there has been a growing demand for these types of things because institutional investors have realized they need to manage their risk more effectively, to have some kind of protection that these derivatives can offer them." In addition, demand has surged as hedge funds and other investors have tried to profit on fluctuations in their values.
Over the past five years, ICAP's revenue has risen 95%, profit has climbed nearly 200%, and its stock, which trades on the London Stock Exchange, has more than quadrupled in value. The company now has more than 3,000 employees, and earned $210 million in the year ended March 31, on revenue of $1.7 billion.
ICAP and other inter-dealer brokers generate about $5 billion of revenue a year trading customized derivatives, according to a research report by Morgan Stanley. Traditional exchanges want a piece of the action.
Mr. Spencer, the son of a British civil servant who advised governments in Asia and Africa on economic matters, holds a physics degree from Oxford University. In 1979, while working as a broker for a now-defunct British firm, he placed a big bet that gold would fall in value, Mr. Spencer recalls. Six weeks later, the Soviet Union invaded Afghanistan. Gold hit an all-time high above $800 an ounce on fears of global financial instability. Mr. Spencer was fired.
He landed at the London office of U.S. investment bank Drexel Burnham Lambert, where he ran into trouble once again. In 1983, without authorization to do so, Mr. Spencer put the firm's capital at risk by buying futures contracts he believed would rise in value, he acknowledges. His plan was to sell them at a profit. Instead, on one such trade, he racked up a loss of more than $100,000, he says. After conducting an investigation, Drexel fired Mr. Spencer, although neither the firm nor United Kingdom regulators took any legal action. Mr. Spencer says the episode was "a deeply sad moment."
He found another job with a small broker, where he began dabbling in the nascent market for derivatives known as interest-rate swaps. They allow a company or a bank to swap one kind of interest-rate exposure for another. A manufacturer holding variable-rate debt, for example, could protect itself against rising interest rates by buying from a bank a derivative that increases in value as rates climb.
Unhappy in his post, Mr. Spencer persuaded another brokerage firm to help him and three friends start their own firm to trade swaps. They opened Intercapital Ltd. in a basement office at the edge of London's financial district. At the time, there were about 20 to 30 inter-dealer brokers in the U.K. But most focused on currency trades, not swaps.
Taking Off
The swaps market took off as more companies turned to them for protection against interest-rate fluctuations. Even small municipal governments in the U.S. began using swaps to manage debt. By 1997, the total face value of outstanding interest-rate swaps had risen to $22 trillion, from $682 billion a decade earlier, according to the International Swaps and Derivatives Association.
Mr. Spencer's firm flourished. He lured brokers away from competitors with richer pay packages. When he moved his company, now known as ICAP, to new offices in 2004, he paid to build a wine cellar there to house his collection, which he says numbers "north of 10,000" bottles. Last September, to celebrate his 50th birthday, he invited about 300 friends to a mansion in the south of France. He paid British pop star Robbie Williams $1.9 million to provide entertainment.
In the mid-1990s, change began sweeping through the financial-services industry as big banks combined into global firms. Mr. Spencer says he figured these customers would want brokers with the same global reach. In 1998, he purchased London-based Exco PLC, a rival broker facing financial problems, which had a bigger presence in U.S. markets. One year later, he bought Garban PLC, a publicly traded broker active in U.S. bond markets.
The push into the U.S. put Mr. Spencer in direct competition with Cantor Fitzgerald LLP, a New York-based firm that dominated trading of U.S. Treasurys and also had global ambitions. Over the years, the two firms traded jabs by hiring brokers away from one another.
Cantor Fitzgerald, which was based at the World Trade Center, lost 658 employees in the Sept. 11 terrorist attacks. Soon after, Mr. Spencer hired away three Cantor brokers in London, prompting Cantor to sue ICAP in Britain's High Court. Cantor claimed ICAP had violated employment contracts the brokers had with Cantor.
'Schoolboyish' Emails
During a 2002 trial, lawyers for Cantor produced emails written by Mr. Spencer in late 2001. About one month after the terrorist attacks, Mr. Spencer had written, in apparent reference to Cantor's problems: "This is the time I have been waiting for." In another email, he wrote that he wanted to "put one up their bottoms." Mr. Spencer says now that the emails were "schoolboyish." But he resented being portrayed by Cantor as "a vulture," he says, adding that after Sept. 11 he proposed a hiring truce between the two feuding firms. Cantor rejected his offer. The two firms reached an out-of-court settlement in 2003; the terms weren't disclosed.
As the chief executive of an enormous company, Mr. Spencer had become one of the faces of the British financial establishment. He became a major backer of the U.K.'s Conservative Party. But his behavior, at times, still drew scrutiny. In early 2004, he bought a derivatives contract for his own account that gave him control of two million shares of Marks & Spencer PLC, a British department-store chain. Several weeks later, the retailer was the subject of a hostile bid, and Mr. Spencer turned a substantial profit.
It later emerged that the day before Mr. Spencer bought the derivatives, he had met with Stuart Rose, a British retailing executive and fellow director of Image Restaurants, a private U.K. company. Mr. Rose was later retained by Marks & Spencer as chief executive officer to help fend off the hostile bid. U.K.'s Financial Services Authority, the market watchdog, launched an investigation into Mr. Spencer's trading. He denied receiving nonpublic information, and was cleared by the FSA in 2004.
ICAP's share of the global market for interest-rate swaps now exceeds 40%, according to a company spokesman. The firm's success in that business has allowed it to expand into other trading sectors. In 2003, Mr. Spencer purchased BrokerTec Global LLC, an electronic-trading system for U.S. Treasurys, for about $250 million.
ICAP now handles more than half of all trading in U.S. Treasurys. It also arranges trades of corporate debt and government bonds and derivatives tied to them, foreign-exchange instruments and energy derivatives.
As trading technology becomes more sophisticated, Mr. Spencer has been beefing up ICAP's electronic-trading capabilities. "That doesn't mean we won't have any brokers, but more and more of what we do will be electronic, and brokers will handle the more complex trades," he said last year.
Craig Donohue, the Chicago Merc's chief executive, contends that exchanges have gained the upper hand over inter-dealer brokerages, which were once regarded as more innovative.
But he isn't counting out Mr. Spencer, whose 21% stake in ICAP gives him a big say in whether the company combines with a larger competitor. "I wouldn't underestimate him," Mr. Donohue says.