The Fear Index

The P&L meter, converted into dollars, was a blur of pure profit.
    Easterbrook said, ‘I wonder how much you guys are going to make from this one trade – twenty million, thirty million? Jesus, Hugo, the regulators are going to be swarming over this like ants at a picnic.’
    Quarry said, ‘Alex? We should go and take that meeting.’
    But Hoffmann, unable to take his eyes from the figures on the trading screen, was not listening. The pressure in his skull was intense. He put his fingers to his wound and traced his stitches. It felt to him as if they were stretched so tight they might split apart.

7

    It can’t continue forever. The nature of exponentials is that you push them out and eventually disaster happens .

    GORDON MOORE, INVENTOR OF MOORE’S LAW (2005)

    THE RISK COMMITTEE of Hoffmann Investment Technologies met briefly at 11.57 a.m., according to a note drawn up subsequently by Ganapathi Rajamani, the company’s chief risk officer. All five members of the senior management team were listed as present: Dr Alexander Hoffmann, president of the company; the Hon. Hugo Quarry, chief executive officer; Lin Ju-Long, chief financial officer; Pieter van der Zyl, chief operating officer; and Rajamani himself.
    It was not quite as formal as the minutes made it sound. Indeed, afterwards, when memories were compared, it was agreed that nobody had even sat down. They all stood around in Quarry’s office, apart from Quarry himself, who perched on the edge of his desk so that he could keep an eye on his computer terminal. Hoffmann took up his former position at the window and occasionally parted the slats of the blinds to check on the street below. That was the other thing everyone remembered: how distracted he seemed.
    ‘Okay,’ said Quarry, ‘let’s keep this quick. I’ve got a hundred billion dollars on the hoof unattended in the boardroom and I need to get back in there. Close the door, will you, LJ?’ He waited until there was no chance of their being overheard. ‘I take it we all saw what just happened. The first question is whether by making such a large bet to the down side on Vista Airways shortly before its share price collapsed we’re going to trigger an official investigation. Gana?’
    ‘The short answer is yes, almost certainly.’ Rajamani was a neat, precise young man, with a strong sense of his own importance. His job was to keep an eye on the fund’s risk levels and ensure they complied with the law. Quarry had poached him from the Financial Services Authority in London six months earlier to serve as a bit of window-dressing.
    ‘Yes?’ repeated Quarry. ‘Even though we couldn’t possibly have known what was going to happen?’
    ‘The whole process is automatic. The regulators’ algorithms will have detected any unusual activity surrounding the airline’s stock immediately prior to the price collapse. That will already be leading them straight to us.’
    ‘But we haven’t done anything illegal.’
    ‘No. Not unless we sabotaged the plane.’
    ‘We didn’t, did we?’ Quarry glanced around. ‘I mean, I’m all in favour of people using their initiative …’
    ‘What they will want to know, however,’ continued Rajamani, ‘is why we shorted twelve and a half million shares at that precise moment. I know this sounds an absurd question, Alex, but is there any way VIXAL could have acquired news of the crash before the rest of the market?’
    Reluctantly Hoffmann let the slats of the blind click shut and turned to face his colleagues. ‘VIXAL takes a direct digital news feed from Reuters – that might give it an advantage of a second or two over a human trader – but so do plenty of other algorithmic systems.’
    Van der Zyl said, ‘Besides, you couldn’t do much in that time. A position the size of ours would have taken some hours to put together.’
    ‘When did we start acquiring the options?’ asked Quarry.
    Ju-Long said, ‘As soon as the European markets opened. Nine o’clock.’
    ‘Can we just stop this right now?’ said Hoffmann irritably. ‘It will take us less than five minutes to show even the most dumb-assed regulator that we shorted that stock as part of a pattern of bets to the down side. It was nothing special. It was a coincidence. Get over it.’
    ‘Well, speaking as a former dumb-ass regulator,’ said Rajamani, ‘I have to say I agree with you, Alex. It’s the pattern that matters, which is why actually I tried to talk to you about it earlier this