The Fear Index

by Robert Harris

  Rajamani checked his screen. ‘Up seventy-seven,’ he conceded.

  ‘Well, thank you. That’s a bloody odd definition of failure, isn’t it? A system that made nine million dollars in the time it took me to shift my arse from one end of the office to the other?’

  ‘Yes,’ said Rajamani patiently, ‘but it is a purely theoretical profit, that could be wiped out the moment the market recovers.’

  ‘And is the market recovering?’

  ‘No, I accept that at the moment the Dow is falling.’

  ‘Well, there is our dilemma, gentlemen, right there. We all agree that the fund should be hedged, but we also have to recognise that VIXAL has demonstrated itself to be a better judge of the markets than we are.’

  ‘Oh, come on, Hugo! There’s obviously something wrong with it! VIXAL is supposed to operate within certain parameters of risk, and it isn’t, therefore it is malfunctioning.’

  ‘I don’t agree. It was right about Vista Airways, wasn’t it? That was absolutely extraordinary.’

  ‘That was a coincidence. Even Alex acknowledged that.’ Rajamani appealed to Ju-Long and van der Zyl. ‘Come on, you fellows – back me up here. To make sense of these positions, the whole world would have to crash in flames.’

  Ju-Long put his hand up like a schoolboy. ‘Since the subject has been raised, Hugo, could I just ask about the Vista Airways short? Did anyone see the news just now?’

  Quarry sat down heavily on the sofa. ‘No, I didn’t. I’ve been rather busy. Why? What are they saying?’

  ‘That the crash was not a mechanical failure after all, but some kind of terrorist bomb.’

  ‘Okay. And?’

  ‘It seems that a warning was posted on a jihadist website while the plane was still in the air. Understandably there is a lot of anger that the intelligence authorities missed it. That was at nine o’clock this morning.’

  ‘I’m sorry, LJ. I’m being a bit slow on the uptake. What does it matter to us?’

  ‘Only that nine o’clock was exactly the time we started shorting the Vista Airways stock.’

  It took Quarry a moment or two to react. ‘You mean to say we’re monitoring jihadist websites?’

  ‘So it would appear.’

  Van der Zyl said, ‘That would be entirely logical, actually. VIXAL is programmed to search the web for incidences of fear-related language and observe market correlations. Where better to look?’

  ‘But that’s a quantum leap, isn’t it?’ asked Quarry. ‘To see the warning, make the deduction, short the stock?’

  ‘I don’t know. We would have to ask Alex. But it is a machine-learning algorithm. Theoretically, it’s developing all the time.’

  Rajamani said, ‘Then it’s a pity it hadn’t developed enough to warn the airline.’

  ‘Oh, come on,’ said Quarry, ‘stop being so bloody pious. It’s a machine for making money; it’s not meant to be a sodding UN goodwill ambassador.’ He leaned his head against the back of the sofa and looked at the ceiling, his eyes darting, trying to absorb the implications. ‘God in heaven. I mean, I’m simply staggered by that.’

  Ju-Long said, ‘It could be a coincidence, of course. As Alex said this morning, the airline short was just part of a whole pattern of bets to the down side.’

  ‘Yeah, but even so, that’s the only short where we’ve actually sold the position and taken the profit. The others we’re holding on to. Which poses the question: why are we holding on to them?’ He felt a tingling along the length of his spine. ‘I wonder what it thinks is going to happen next?’

  ‘It does not think anything,’ said Rajamani impatiently. ‘It is an algorithm, Hugo – a tool. It is no more alive than a wrench or a car-jack. And our problem is that it is a tool that has become too unreliable to depend on. Now, time is pressing and I really must ask this committee formally to authorise an override on VIXAL and start an immediate rehedging of the fund.’

  Quarry looked at the others. He was good at nuances, and he detected that something had just shifted slightly in the atmosphere. Ju-Long was staring ahead impassively, van der Zyl examining a piece of lint on the sleeve of his jacket. They seemed embarrassed. Decent men, he thought, and clever, but weak. And they liked their bonuses. It was all very easy for Rajamani to order VIXAL to be shut down; it would cost him nothing. But they had received four million dollars each last year. He weighed the odds. They would give him no trouble, he decided. As for Hoffmann, he took no interest in the personnel of the firm apart from the quants: he would back him whatever he did. ‘Gana,’ he said pleasantly, ‘I’m sorry, but I’m afraid we’re going to have to let you go.’

  ‘What?’ Rajamani frowned at him. Then he tried to smile: a ghastly nervous rictus. He tried to treat it as a joke. ‘Come on, Hugo …’

  ‘If it’s any consolation, I was going to fire you next week whatever happened. But now seems like a better time. Write it down in your minutes, why don’t you? “After a short discussion, Gana Rajamani agreed to relinquish his duties as chief risk officer, with immediate effect. Hugo Quarry thanked him for all he had done for the company” – which as far as I’m concerned, by the way, is sod all. Now clear your desk and get off home and spend more time with those charming children of yours. And don’t worry about money – I’m more than happy to pay you a year’s salary just for the pleasure of not having to see you again.’

  Rajamani was recovering: afterwards Quarry was forced to give him credit for resilience at least. He said, ‘Let me be clear about this – you’re dismissing me simply for doing my job?’

  ‘It’s partly for doing the job, but mostly for being such a pain in the ass about doing it.’

  Rajamani said, with some dignity, ‘Thank you for that. I’ll remember those words.’ He turned to his colleagues. ‘Piet? LJ? Are you going to intervene at this point?’ Neither man moved. He added, slightly more desperately, ‘I thought we had an understanding …’

  Quarry got up and pulled the power cable out of the back of Rajamani’s computer. It emitted a slight rattle as it died. ‘Don’t make copies of any of your files – the system will tell us if you do. Turn in your mobile phone to my assistant on your way out. Don’t speak to any other employees of the company. Leave the premises within fifteen minutes. Your compensation package is conditional on your abiding by our confidentiality agreement. Is that understood? I really would prefer not to call in security – it always looks so cheap. Gentlemen,’ he said to the other two, ‘shall we leave him to his packing?’

  Rajamani called after him, ‘When word of this gets out, this company will be finished – I’ll see to that.’

  ‘Yes, I’m sure.’

  ‘You said VIXAL could fly us all into a mountainside, and that’s exactly what it’s doing …’

  Quarry put his arms around Ju-Long and van der Zyl and guided them out of the office ahead of him. He closed the door without looking back. He knew that the entire drama had been played out to an audience of quants, but that could not be helped. He felt quite cheerful; he always felt good after he’d fired someone: it was cathartic. He smiled at Rajamani’s assistant: a pretty girl; she would have to go too, unfortunately. Quarry took a pre-Christian view of these rituals: it was always best to bury the servants with the dead master in case he might require them in the next world.

  ‘I’m sorry about that,’ he said to Ju-Long and van der Zyl, ‘but at the end of the day we’re innovators in this shop, are we not, or we are nothing. And I’m afraid Gana is the kind of chap who’d have turned up on the quayside in 1492 and told Columbus he couldn’t set sail because of his negative risk assessment.’

  Ju-Long said, with an asperity Quarry had not expected, ‘Risk was his responsibility, Hugo. You may have got rid of him, but you have not got rid of the problem.’

  ‘I appreciate that, LJ, and I know he was your friend.’ He put his hand on Ju-Long’s shoulder and gazed into his dark eyes. ‘But don’t forget that at this precise moment this company is about eighty million dollars
richer than it was when we came in to work this morning.’ He gestured to the trading floor: the quants had all returned to their places; there was a semblance of normality. ‘The machine is still functioning, and frankly, until Alex tells us otherwise, I think we have to trust it. We have to assume VIXAL is seeing a pattern in events that we can’t discern. Come on – people are looking.’

  They moved off, along the side of the trading floor, Quarry taking the lead. He was keen to get them away from the scene of Rajamani’s assassination. As he walked, he tried yet again to get Hoffmann on his mobile number; yet again he was put straight through to voicemail. This time he didn’t even bother to leave a message.

  Van der Zyl said, ‘You know, I was thinking.’

  ‘What were you thinking, Piet?’

  ‘That VIXAL must have extrapolated a general market collapse.’

  ‘You don’t say.’

  But van der Zyl missed the sarcasm. ‘Yes, because if you look at the stocks it’s shorting – what are they? Resorts and casinos, management consulting, food and household goods, all the others – these are just right across the board. They are not at all sector-specific.’

  ‘Then there is the short on the S and P,’ said Ju-Long, ‘and the out-of-the-money puts …’

  ‘And the Fear Index,’ added van der Zyl. ‘You know, a billion dollars of options on the Fear Index – my God!’

  It certainly was a hell of a lot, thought Quarry. He came to a halt. In fact, it was more than a hell of a lot. Until that moment, in the general welter of data that had been thrown around, he had rather missed the significance of the size of that position. He stepped across to a vacant terminal, bent over the keyboard and quickly called up a chart of the VIX. Ju-Long and van der Zyl joined him. The graphic showed a gentle wave pattern in the value of the volatility index as it had fluctuated over the past two trading days, the line rising and falling inside a narrow range. However within the last ninety minutes it had definitely started trending upwards: from a base of around twenty-four points at the US opening, it had now climbed to almost twenty-seven. It was too early to say whether this marked a significant escalation in the level of fear in the market itself. Nevertheless, even if it didn’t, on a billion-dollar punt, they were looking at almost a hundred million in profit right there. Once again Quarry felt a cold tremble run down his back.

  He pressed a switch and picked up the live audio feed from the pit of the S&P 500 in Chicago. It was a service they subscribed to. It gave them an immediate feel for the market you couldn’t always get from just the figures. ‘Guys,’ an American voice was saying, ‘the only buyer I have on my sheet here, guys, from about nine twenty-six on, is a Goldman buyer at fifty-one even two hundred and fifty times. Other than that, guys, every entry I have has been sell-side activity, guys. Merrill Lynch I had big-time seller. Pru Bache I had big-time seller, guys, all the way from fifty-nine to fifty-three. And then we saw Swiss Bank and Smith coming in big-time sellers—’

  Quarry switched it off. He said, ‘LJ, why don’t you make a start on liquidating that two-point-five billion in T-bills, just in case we need to show some collateral tomorrow?’

  ‘Sure, Hugo.’ His eyes met Quarry’s. He had seen the significance of the movement in the VIX; so had van der Zyl.

  ‘We should try to talk to one another at least every half hour,’ said Quarry.

  ‘And Alex?’ said Ju-Long. ‘He ought to see this. He would be able to make some sense of it.’

  ‘I know Alex. He’ll be back, don’t you worry.’

  The three men went their separate ways – like conspirators, thought Quarry.

  14

  Only the paranoid survive.

  ANDREW S. GROVE, PRESIDENT AND CEO OF INTEL CORPORATION

  HOFFMANN HAD MANAGED to hail a taxi on the Rue de Lausanne, one block away from the Hotel Diodati. Afterwards the taxi driver remembered the fare distinctly for three reasons. First because he was driving towards the Avenue de France at the time and Hoffmann needed to go in the opposite direction – he asked to be taken to an address in the suburb of Vernier, close to a local park – which meant he had to perform an illegal U-turn across several lanes of traffic. And second because Hoffmann had seemed so edgy and preoccupied. When they passed a police car heading in the opposite direction, he had sunk low in his seat and put up his hand to shield his eyes. The driver had watched him in the mirror. He was clutching a laptop. His phone rang once but he didn’t answer it; afterwards he turned it off.

  A sharp breeze was stiffening the flags above the official buildings; the temperature was barely half what the guidebooks promised for the time of year. It felt as if rain was coming. People had deserted the pavements and taken to their cars, thickening the mid-afternoon traffic. Consequently it was after four when the taxi finally approached the centre of Vernier, and Hoffmann abruptly leaned forward and said, ‘Let me out here.’ He handed over a one-hundred-franc note and walked away without waiting for the change: that was the third reason the driver remembered him.

  Vernier stands on hilly ground above the right bank of the Rhône. A generation ago it was a separate village, before the city spread across the river to claim it. Now the modern apartment blocks are close enough to the airport for their occupants to be able to read the names on the sides of the descending jets. Still, there are parts of the centre that retain the character of a traditional Swiss village, with overhanging roofs and green wooden shutters, and it was this aspect of the place that had stayed in Hoffmann’s mind for the past nine years. In his memory he associated it with melancholy autumn afternoons, the street lights just starting to switch on, children coming out of school. He turned a corner and found the circular wooden bench where he used to sit when he was early for his appointments. It girdled a sinister old tree in vigorous leaf. Seeing it again, he couldn’t bear to approach it but kept to the opposite side of the square. Nothing much else had changed: the laundry, the cycle shop, the dingy little café in which the old men gathered, the chapel-like maison d’artisant communal. Next to it was the detached building where he was supposed to have been cured. It had been a shop once, a greengrocer’s maybe, or a florist’s – something useful; the owners would have lived above the premises. Now its large downstairs window was frosted and it looked like a dentist’s surgery. The only difference from eight years ago was the video camera that covered the front door: that was new, he thought.

  Hoffmann’s hand shook as he pressed the buzzer. Did he have the strength to go through it all again? The first time he hadn’t known what to expect; now he would be deprived of the vital armour of ignorance.

  A young man’s voice said, ‘Good afternoon.’

  Hoffmann gave his name. ‘I used to be a patient of Dr Polidori. My secretary was supposed to make an appointment for tomorrow.’

  ‘I’m afraid Dr Polidori spends every Friday seeing her patients at the hospital.’

  ‘Tomorrow is too late. I need to see her now.’

  ‘You can’t see her without an appointment.’

  ‘Tell her it’s me. Say it’s urgent.’

  ‘What name was it again?’

  ‘Hoffmann.’

  ‘Wait, please.’

  The entryphone went dead. Hoffmann glanced up at the camera and instinctively raised his hand to cover his head from view. His wound was no longer tacky with blood but powdery: when he inspected his fingertips, they were covered with what looked like fine particles of rust.

  ‘Come in, please.’ There was a brief buzz as the door was unlocked – so brief that Hoffmann missed it and had to try a second time. Inside it was more comfortable than it used to be – a sofa and two easy chairs, a rug in soothing pastel, rubber plants, and behind the head of the receptionist a large photograph of a woodland glade with shafts of light falling from between the trees. Next to it was her certificate to practise: Dr Jeanne Polidori, with a master’s degree in psychiatry and psychotherapy from the University of Geneva. Another camera scanned the room. The young man at the
desk scrutinised him carefully. ‘Go on up. It’s the door straight ahead.’

  ‘Yes,’ said Hoffmann. ‘I remember.’

  The familiar creak of the stairs was enough to unleash a flood of old sensations. Sometimes he had found it almost impossible to drag himself to the top; on the worst days he had felt like a man without oxygen trying to climb Everest. Depression wasn’t the word for it; burial was more accurate – entombment in a thick, cold concrete chamber, beyond the reach of light or sound. Now he was sure he could not endure it again. He would rather kill himself.

  She was in her consulting room, sitting at her computer, and stood as he came in. She was the same age as Hoffmann and must have been good-looking when she was younger, but she had a narrow gully that ran from just below her left ear down her cheek all the way to her throat. The loss of muscle and tissue had given her a lopsided look, as if she had suffered a stroke. Usually she wore a scarf; today not. In his artless way he had asked her about it once: ‘What the hell happened to your face?’ She told him she had been attacked by a patient who had been instructed by God to kill her. The man had now fully recovered. But she had kept a pepper spray in her desk ever since: she had opened the drawer and showed it to Hoffmann – a black can with a nozzle.

  She wasted no time on a greeting. ‘Dr Hoffmann, I’m sorry, but I told your assistant on the phone I can’t treat you without a referral from the hospital.’

  ‘I don’t want you to treat me.’ He opened the laptop. ‘I just want you to look at something. Can you do that at least?’

  ‘It depends what it is.’ She scrutinised him more closely. ‘What happened to your head?’

  ‘We had an intruder in our house. He hit me from behind.’