The Fear Index

by Robert Harris

  ‘BLOODY BRILLIANT,’ WHISPERED Quarry, catching Hoffmann by the elbow as they left the boardroom.

  ‘You think? I got the feeling I’d lost them at one point.’

  ‘They don’t mind being lost, as long as you bring them back eventually to what they really want to see, which is the bottom line. And everyone loves a bit of Greek philosophy.’ He steered Hoffmann ahead of him. ‘My God, old Ezra’s an ugly bugger, but I could give him a kiss for that bit of mental arithmetic at the end.’

  The clients were waiting patiently on the edge of the trading floor, all except for young Herxheimer and the Pole, Łukasiński, who had their backs to the others and were talking with quiet animation into their cell phones. Quarry exchanged a look with Hoffmann. Hoffmann shrugged. Even if they were breaking the terms of the non-disclosure agreement, there was not much that could be done. NDAs were bitches to enforce without evidence of breach, by which point it was too late in any case.

  ‘This way, if you please,’ called Quarry, and with his finger held aloft, tour-guide-style, he led them in a crocodile across the big room. Herxheimer and Łukasiński quickly ended their calls and rejoined the group. Elmira Gulzhan, wearing a large pair of sunglasses, automatically assumed the head of the queue. Clarisse Mussard, in her cardigan and baggy pants, shuffled along in her wake, looking like her maid. Instinctively Hoffmann glanced up at the CNBC ticker to see what was happening on the European markets. The week-long slide seemed to have stopped at last; the FTSE 100 was up by nearly half of one per cent.

  They gathered round a trading screen in Execution. One of the quants vacated his desk to give them a better view.

  ‘So, this is VIXAL-4 in operation,’ said Hoffmann. He stood back to let the investors get closer to the terminal. He decided not to sit: that would have allowed them to see the wound on his scalp. ‘The algorithm selects the trades. They’re on the left of the screen in the pending orders file. On the right are the executed orders.’ He moved a little nearer so that he could read the figures. ‘Here, for instance,’ he began, ‘we have …’ He paused, surprised by the size of the trade; for a moment he thought the decimal point was in the wrong place. ‘Here you see we have one and a half million options to sell Accenture at fifty-two dollars a share.’

  ‘Whoa,’ said Easterbrook. ‘That’s a heck of a bet on the short side. Do you guys know something about Accenture we don’t?’

  ‘Fiscal Q2 profits down three per cent,’ rattled off Klein from memory, ‘earnings sixty cents a share: not great, but I don’t get the logic of that position.’

  Quarry said, ‘Well, there must be some logic to it, otherwise VIXAL wouldn’t have taken the options. Why don’t you show them another trade, Alex?’

  Hoffmann changed the screen. ‘Okay. Here – you see? – here’s another short we’ve just put on this morning: twelve and a half million options to sell Vista Airways at seven euros twenty-eight a share.’

  Vista Airways was a low-cost, high-volume European airline, which none of those present would have dreamed of being seen dead on.

  ‘Twelve and a half million?’ repeated Easterbrook. ‘That must be a heck of a chunk of the market. Your machine has got some balls, I’ll give it that.’

  ‘Really, Bill,’ said Quarry, ‘is it that risky? All airline stocks are fragile these days. I’m perfectly easy with that position.’ But he sounded defensive, and Hoffmann guessed he must have noticed that the European markets were up: if a technical recovery spread across the Atlantic, they might be caught by a rising tide and end up having to sell the options at a loss.

  Klein said, ‘Vista Airways had twelve per cent passenger growth in the final quarter and a revised profits forecast up nine per cent. They’ve just taken delivery of a new fleet of aircraft. I don’t get the sense of that position, either.’

  ‘Wynn Resorts,’ said Hoffmann, reading off the next screen. ‘A million-two short at one hundred and twenty-four.’ He frowned, puzzled. These enormous bets on the down side were unlike VIXAL’s normal complex pattern of hedged trades.

  ‘Well that one truly is amazing to me,’ said Klein, ‘because they had Q1 growth up from seven-forty million to nine-oh-nine, with a cash dividend of twenty-five cents a share, and they’ve got this great new resort in Macau that’s literally a licence to print money – it turned over twenty billion in table games in Q1 alone. May I?’ Without waiting for permission, he leaned past Hoffmann, seized the mouse and started clicking through the recent trades. His suit smelled like a dry-cleaning store; Hoffmann had to turn away. ‘Procter and Gamble, six million short at sixty-two … Exelon, three million short at forty-one-fifty … plus all the options … Jesus, Hoffmann – is an asteroid about to hit the earth, or what?’

  His face was practically pressed against the screen. He produced a notebook from his inside pocket and began scribbling down the figures, but Quarry reached over and deftly plucked it from his hand. ‘Naughty, Ezra,’ he said. ‘You know this is a paperless office.’ He tore out the page, screwed it into a ball and put it in his pocket.

  François de Gombart-Tonnelle, Elmira’s lover, said, ‘Tell me, Alex, a big short such as any one of these – does the algorithm put it on entirely independently, or does it require human intervention to execute?’

  ‘Independently,’ replied Hoffmann. He wiped the details of the trades from the screen. ‘First the algorithm determines the stock it wishes to trade. Then it examines the trading pattern of that stock over the past twenty days. Then it executes the order itself in such a way as to avoid alerting the market and affecting the price.’

  ‘So the whole process is really just fly-by-wire? Your traders are like pilots in a jumbo jet?’

  ‘That’s it exactly. Our system speaks directly to the executing broker’s system, and then we use their infrastructure to hit the exchange. Nobody telephones a broker any more. Not from this shop.’

  Iain Mould said, ‘There must be human supervision at some point, I hope?’

  ‘Yes, just like there is in the cockpit of a jumbo – there’s constant supervision, but not usually intervention, not unless something starts going wrong. If one of the guys in Execution sees an order going through that worries him, naturally he can put a stop on it until it’s cleared by me or Hugo, or one of our managers.’

  ‘Has that ever happened?’

  ‘No. Not with VIXAL-4. Not so far.’

  ‘How many orders does the system handle a day?’

  Quarry took over: ‘About eight hundred.’

  ‘And they’re all decided algorithmically?’

  ‘Yes. I can’t remember the last time I did a trade myself.’

  ‘Your prime broker is AmCor, I assume, given your long relationship?’

  ‘We have various prime brokers these days, not just AmCor.’

  ‘More’s the pity,’ said Easterbrook, laughing.

  Quarry said, ‘With the greatest respect to Bill, we don’t want one single brokerage firm knowing all our strategies. At the moment we use a mix of big banks and specialist houses: three for equities, three for commodities and five for fixed income. Let’s take a look at the hardware, shall we?’

  As the group moved off, Quarry pulled Hoffmann aside. ‘Am I missing something here,’ he said quietly, ‘or are those positions way out of line?’

  ‘They do look a little more exposed than normal,’ agreed Hoffmann, ‘but nothing to worry about. Now I think of it, LJ mentioned that Gana wanted a meeting of the Risk Committee. I told him to talk to you about it.’

  ‘Christ, is that what he wanted? I didn’t have time to take his call. Damn it.’ Quarry glanced at his watch, then up at the tickers. The European markets were holding on to their early gains. ‘Okay, let’s grab five minutes while they’re all having coffee. I’ll tell Gana to meet us in my office. You go on ahead and keep them happy.’

  The computers were housed in a big windowless room on the opposite side of the trading floor, and this time Hoffmann led the way. He stood in front of the face-r
ecognition camera – only a few were cleared for access to this inner sanctum – and waited for the bolts to click back, then pushed at the door. It was solid, fireproof, with a pane of reinforced glass in the centre and rubber vacuum seals on the sides, so that it made a slight whoosh as it opened, the bottom of the seal skimming the white-tiled floor.

  Hoffmann went in first; the others followed. Compared to the relative silence of the trading floor, the busy racket of the computers sounded almost industrial. The arrays were stacked on warehouse shelving, their rows of red and green indicator lights flickering rapidly as they processed data. At the end of the room, in a pair of long Plexiglas cabinets, two IBM TS3500 tape robots patrolled up and down on monorails, shooting with the speed of striking snakes from one end to the other as VIXAL-4 instructed them to store or retrieve data. It was several degrees colder than the rest of the building. The noise of the powerful air-conditioning needed to keep down the temperature of the central processing units, combined with the whir of the fans on the motherboards themselves, made it surprisingly difficult to hear. When everyone was inside, Hoffmann had to raise his voice for the people at the back.

  ‘In case you think this is impressive, I should point out that it is only four per cent of the capacity of the CPU farm at CERN, where I used to work. But the principle is the same. We have nearly a thousand standard CPUs,’ he said, resting his hand proudly on the shelves, ‘each with two to four cores, exactly the same as those you have at home, except without the casing and repackaged for us by a white box company. We’ve found this to be much more reliable and cost-effective than investing in supercomputers, and easier to upgrade, which we’re doing all the time. I guess you’re familiar with Moore’s Law? This states that the number of transistors that can be placed on an integrated circuit – which basically means memory size and processing speed – will double every eighteen months, and costs will halve. Moore’s Law has held with amazing consistency since 1965, and it still holds. In CERN in the nineties we had a Cray X-MP/48 supercomputer which cost fifteen million dollars and delivered half the power a Microsoft Xbox now gives you for two hundred bucks. You can imagine what that trend means for the future.’

  Elmira Gulzhan was clasping her arms and shivering exaggeratedly. ‘Why does it have to be so damn cold in here?’

  ‘The processors generate a lot of heat. We have to try to keep them cool to stop them breaking down. If we were to shut off the air-conditioning in here, the temperature would rise at a rate of one degree Celsius a minute. Within twenty minutes it would be very uncomfortable. In half an hour we’d have a total shutdown.’

  Etienne Mussard said, ‘So what happens if there is a power cut?’

  ‘For short-term interruptions, we switch to car batteries. After ten minutes of no mains power, diesel generators in the basement would cut in.’

  ‘What would happen if there was a fire,’ asked Łukasiński, ‘or this place was attacked by terrorists?’

  ‘We have full system back-up, naturally. We’d trade straight through. But it isn’t going to happen, don’t worry. We’ve invested a lot in security – sprinkler systems, smoke detectors, firewalls, video surveillance, guards, cyber-protection. And remember, this is Switzerland.’

  Most people smiled. Łukasiński did not. ‘Is your security in-house, or outsourced?’

  ‘Outsourced.’ Hoffmann wondered why the Pole was so obsessed with security. The paranoia of the rich, he guessed. ‘Everything is outsourced – security, legal affairs, accountancy, transport, catering, technical support, cleaning. These offices are rented. Even the furniture is rented. We aim to be a company that not only makes money out of the digital age; we want to be digital. That means we try to be as frictionless as possible, with zero inventory.’

  ‘What about your own personal security?’ persisted Łukasiński. ‘Those stitches – I understand you were attacked in your home last night.’

  Hoffmann felt an odd stab of guilt and embarrassment. ‘How do you know about that?’

  Łukasiński said, offhand, ‘Someone told me.’

  Elmira rested her hand on Hoffmann’s arm; her long brown-red nails were like talons. ‘Oh Alex,’ she said softly, ‘how awful for you.’

  ‘Who?’ demanded Hoffmann.

  ‘If I could just say,’ interjected Quarry, who had slipped in unnoticed at the back, ‘what happened to Alex was nothing whatever to do with company business – just some lunatic who I’m sure will be picked up by the police. And to answer your question directly, Mieczyslaw, we have now taken steps to give Alex additional protection until the issue is resolved. Now does anyone have any more questions directly relating to the hardware?’ There was silence. ‘No? Then I suggest we get out of here before we all freeze to death. There’s coffee in the boardroom to warm us up. If you all go ahead, we’ll join you in a couple of minutes. I just need to have a quick word with Alex.’

  THEY WERE MIDWAY across the trading floor and their backs were to the big TV screens when one of the quants gave a loud gasp. In a room where nobody spoke in much above a whisper, the exclamation rang out like a gunshot in a library. Hoffmann halted in his tracks and turned to see half his workforce rising to their feet, drawn out of their seats by the images on Bloomberg and CNBC. The physicist nearest to him put his hand to his mouth.

  Both the satellite channels were showing the same footage, obviously filmed on a mobile phone, of a passenger airliner coming in to land at an airport. It was clearly in trouble, descending far too quickly, and at an odd angle, with one wing much higher than the other, smoke streaming out of its side.

  Someone grabbed a remote and pumped up the sound.

  The jet passed out of sight behind a control tower and then reappeared, skimming the tops of some low sandy-coloured buildings – hangars, perhaps; there were fir trees in the background. It seemed to graze one of the buildings with its underbelly, a caressing gesture almost, and then abruptly it exploded in a vast expanding ball of yellow fire that carried on rolling and rolling. One of the wings with an engine still attached rose out of the spreading inferno and performed graceful cartwheels up into the sky. The lens followed it shakily until it dropped out of shot, and then the sound of the explosion and the shockwave reached the camera. There were tinny screams and frantic shouts in a language Hoffmann could not quite make out – Russian maybe – the picture shook, and then cut to a later, more stable shot of thick black oily smoke, roiled with orange and yellow flames, unfurling itself above the airport.

  Over the images the presenter’s voice – American, female – said breathlessly: ‘Okay, so those were the scenes just a few minutes ago when a Vista Airways passenger jet with ninety-eight people on board crashed on its approach to Moscow’s Domodedovo Airport …’

  ‘Vista Airways?’ said Quarry, wheeling round to confront Hoffmann. ‘Did she just say Vista Airways?’

  A dozen muttered conversations broke out simultaneously across the trading floor: ‘My God, we’ve been shorting that stock all morning.’ ‘How weird is that?’ ‘Someone just walked over my grave.’

  ‘Will you turn that damn thing off?’ called Hoffmann. When nothing happened, he strode between the desks and snatched the remote from the hands of the hapless quant. Already the footage was starting to repeat, as it doubtless would throughout the day until familiarity at last eroded its power to titillate. Finally he found the mute button and the room was quiet again. ‘All right,’ he said. ‘That’s enough. Let’s get on with our work.’

  He threw the remote on to the desk and made his way back to the clients. Easterbrook and Klein, hardened veterans of the dealing room, had already lunged for the nearest terminal and were checking the prices. The others were motionless, stunned, like credulous peasants who had just witnessed a supernatural event. Hoffmann could feel their eyes upon him. Clarisse Mussard even made the sign of the cross.

  ‘My God,’ said Easterbrook, looking round from the trading screen, ‘it only happened five minutes ago and Vista’s stock is down
fifteen per cent already. It’s crashing.’

  ‘Nose-diving,’ added Klein, with a nervous giggle.

  ‘Save it, guys,’ said Quarry, ‘there are civilians present.’ He addressed the clients: ‘I remember a couple of traders at Goldman who happened to be shorting airline insurance on the morning of 9/11. They did a high-five in the middle of the office when the first plane hit. They weren’t to know. None of us knows. Shit happens.’

  Klein’s eyes were still riveted to the market data. ‘Whoa,’ he murmured appreciatively, ‘your little black box is really cleaning up, Alex.’

  Hoffmann stared over Klein’s shoulder. The figures in the Execution column were changing rapidly as VIXAL took profits on its options to sell Vista Airways’ stock at the pre-crash price. 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.