by Josh Karnes
Chapter 9
Houston, Texas
2Two years ago
What Tim had said about Roth earlier in the morning had been gnawing at James all day. James knew Tim was mostly just bitter and jealous, and that he was prone to exaggeration, but still. There was a lot of truth to what he had said. James didn’t really have anything against the Roth guys. They had figured out a really successful system for making money, so good for them, right? But the one thing that did really bug him is that they mostly weren’t gambling with their own money. They just rolled the dice with someone else’s chips on the table, and took part of what they won. He couldn’t put his finger on it, but something about it just didn’t quite seem fair. Maybe it was just that he felt like he had earned his money the old fashioned way: get a job, try to work hard and do right, collect an honest paycheck. That way seemed right, but why did the Roth method work so much better?
This conflict had been in the back of James’s mind all morning while he went about his normal tasks, consulting the white board to see what was next on the list and knocking out each item. He had a number of daily checkups to be done on systems TCP had installed for their clients and he had to write up a report entry for each one. Most were on a once-a-week basis. Some were daily. Then he had some new work projects to contribute to, but these were mostly paint by numbers. Plug in how many users, how many so-called “speeds and feeds”, how much data had to be stored and transmit, a few other concrete values, and voila, the design is basically pre-defined. Every once in a while someone would come up with some new product or feature that would cause them to make an adjustment to their formula, like when the next generation wireless technology hits and it causes ripple effects into the core networks. But by and large, this was a really simple problem to solve. So those projects didn’t really get him too excited. And the Roth thing would sneak in, and annoy him. What is it Morpheus said? You don't know what it is, but it's there, like a splinter in your mind, driving you mad. This was starting to be kind of like that.
Just as he was pondering this, none other than Tim Chandler came bopping into his cubicle again. Didn’t that guy have work to do?
“So, James. You eat?”
“What?”
“You know. Eat? Lunch? English? America? It’s lunch time, bro.”
“Oh. Yeah. You know I’m not much for going out to lunch. I’m a brown bag type of guy,” James said as he rattled the paper on his authentic brown lunch sack to emphasize the point.
“Dude. Throw that in the fridge and let’s hit Paulies.”
“Nah, man. I’m on a budget.”
“I know. It’s on me. I’ll even drive. Come on.”
“I just started on my update to the Reliant refresh.”
“It’ll keep. Come on. I need to bounce an idea off of you. I need that big brain of yours. I won’t take ‘no’ for an answer.” Drama queen, laying it on thick. Must be another take on his get-rich-quick schemes. Some emerging multi-level marketing thing. Or internet currency. Or a perpetual motion machine that the government has been covering up for decades. Or how to game the health insurance system. He was full of this stuff. Some of it was even legal.
“Okay. You drive. You know I’m sharing a car with Eli, he dropped me this morning.”
“Roger that. Pizza’s getting cold.”
Tim didn’t let on what was on his mind while driving over, instead complaining about the Rockets for the five-minute trip. It hardly mattered, because James really did need to get away and get his mind off of things. Roth, Greer, debt, financial catastrophe. It did occur to James that it was Tim that brought all of this up this morning. He really needed some new friends.
Paulies was a noisy and crowded pizza-by-the-slice joint that was extremely popular with the geek set during the lunch rush. It featured grimy decor that looked like it was recycled from an 80s Pizza Hut or maybe one of those thousands of New York food-court style pizzerias. They grabbed a booth featuring buffed smooth naugahide red upholstery with only a few cigarette burns and genuine Formica table veneer with various ‘John + Jane = Love’ type pocket-knife carvings on the surface, some of which were emphatically enhanced with ball-point pen ink. Adding to the class of the joint was the grease-saturated paper plates, plastic sporks and brown paper towels on a roll that passed for china and linens. The experience could only be enhanced with a light beer in an opaque plastic disposable cup, but since it was the middle of the day both guys opted for the flat Diet Coke. Don’t want to overdo it.
The pizza was good and the vibe was just right for what Tim had come to present.
“Alright, Tim. I’m on pins and needles. Tell me what you got cookin'.”
“Remember this morning I was telling you about Roth,” Tim started in a hushed tone, eyes darting around. It was like a spoof of a spy movie.
“Yeah, I remember. Roth gets rich using our system to print money, something like that.”
“Yeah, something like that. You know how it works, right?”
“I think I know the broad strokes. They use high performance networks and computing systems to make favorable trades. Some other rich guys buy into their fund, and they make trades with the fund money, take a commission on the winners and let the investors lose on their own. Something like that?”
“It’s kind of like that, but more tricky. They actually look for opportunities for arbitrage. You know about arbitrage?”
“I have a general idea.”
“Okay. So they lease network feeds from several different banks. These network feeds are basically like a stream of trade data, offers to sell and offers to buy. All of that monopoly money stuff those guys trade, from stocks to commodities like steel and oil to foreign currency. Whatever. And they feed these streams all into one computer system, the one we built. This system runs a special piece of software, the only part we didn’t build, that monitors all of these streams of data and looks for when, for just an instant, one feed is offering to sell something for a lower price than another feed is offering to buy the same thing. Then, BAM! The computer makes a gigantic trade and all at once they buy and sell the same thing and pocket the profit.”
“When you say, ‘the same thing’...”
“Okay, say for instance it’s, umm, Reliant Energy stock, okay? So just for example, say on feed A, there is an offer to sell a million shares of Reliant stock for twenty dollars. And at the exact same moment, feed B has an offer to buy a million shares of Reliant stock for twenty dollars and ten cents. So the computer recognizes this match and automatically buys the million shares for twenty and sells them immediately to the other buyer for twenty and ten cents. Just like that, they make, what’s that, a hundred thousand dollars, all in one instant.”
“I get the idea, but why would there ever be conditions like this? Seems like the guy on feed B would just buy them for twenty bucks even from the seller on feed A, cut out the middleman. Don’t the banks talk to each other?”
“Aha! That’s where the magic is. That’s why Roth is paying us to provide a super high performance system. The thing is, there are delays. You know, latency? It takes some time for the data to make it from point A to point B. So let’s say it takes fifty milliseconds for sell offer to make it from the bank at feed A to Roth, and it takes a hundred milliseconds for the buy offer to make it from feed B. The buyer on feed B may have missed the offer on feed A because it happened before. And to top this off, the banks have a window of time where they give you a chance to respond to any offer, buy or sell. They do this because of this delay. Some other broker, without an ultra high performance system, it may take two hundred milliseconds for the offer to get there. So Roth may be able to act on the offer before someone else can, because of their super high end system.”
“Alright. So Roth has this killer system for making money by leveraging timing differences between bank feeds. Is that the basic idea?”
“You got it. That’s exactly what they do. And they do this like thousands of times a second in
some cases. Buying, selling, buying, selling. Racking up the dough.”
“You didn’t bring me here just to tell me about Roth’s money making system…” prompted James.
“Right. Here’s the thing. Why should guys like Roth make all the money on this?”
“Maybe, because they are the ones that came up with the idea and they are taking the risk?”
“Right, but what if there was a way to do something similar, without the risk. Sure thing. Same principle.”
“Tim, how do you do the same principle without any risk?”
“That’s what I wanted to talk to you about. I had an idea. What if we could get two offers, one buy and one sell, both from the same feed, with the buy offer higher than the sell offer?”
“How would we do that?”
“We use the delay. Imagine you get a retail trading account and you live in Timbuktu, so you have like six hundred milliseconds of delay. You get an offer to buy something for a certain price, you can buy it. But someone else getting the same offer in a building next door to the bank in New Jersey can respond a half of a second quicker. The bank has to cover both sales, right?”
“I guess so.”
“They do. So even if the price goes up before you can respond to it in Timbuktu, they bank has to sell it at the price they offered it. So imagine you could buy it in Timbuktu, and then go back in time like a half a second and sell it to the guy in New Jersey at the higher price.”
“Well, that’d be quite a trick. If it was possible, everyone would be doing it.”
“It is possible. Here’s how. We get two feeds from the same bank. We set up a computer with two network cards, one for each feed. Now, I put a switch in between the wall and one of the network cards, and I blast traffic into the switch, jumbo frames and that kind of stuff, so that there’s a ton of delay on one of the feeds. Then, we can watch the price of a stock on the fast feed and know what’s coming on the delayed feed, maybe a half a second before it hits. So if a stock takes a quick drop in price, then we buy it on the fast feed, after it has dropped in price, and then sell it on the delayed feed, before it drops.”
“Tim. Man. That has got to be illegal. And surely the bank has a way to protect against that.”
“Yeah, they have a way to detect it if you do it a lot, like if I just monitored all stocks and trades and did this like a thousand times a day. But if we do it just once, then it’s not a pattern. They won’t see it.”
“Okay, for the sake of argument, let’s say I am buying into this. And I’m not. But if I was, how would you pick the stock? How would you know what was going to drop?”
“You pick some commodity to watch, something that is really volatile, that has lots of big jumps happening in short time.”
“Right, but then how in the world do you catch it when this happens, and then make the trade? You would have to be literally watching this twenty-four-seven.”
“And that, my friend, is where your big brain comes in. You write a script to monitor the feeds and look for the condition, and then make the trade. We build up the system, we put money into an account from some trading house, and then we just run the script. It hits and we get our target number, we pocket the profit, and then shut it down.”
“I don’t think that would work. The reason Roth can do this kind of thing is because there are millions of dollars of other people’s money to buy stock with. Even if we doubled our money, that’s like, what, a thousand dollars? Totally not worth it. We’d have to have like hundreds of thousands of dollars to make it worth it.”
“No, I figured that out too. You heard of leverage? If we do this with foreign currency, then there are brokerages who will let us trade up to a thousand to one leverage. That means for every dollar in the account, we can trade a thousand dollars. It would normally be incredibly risky since you are basically getting a loan from the brokerage and if you lose your dollar, you also owe a thousand dollars to the broker. But we are not going to lose. We would have it wired. So we put a thousand dollars in the account and we can trade a million dollars.”
“Wow. Well, the problem there, Tim, is I don’t have a thousand dollars. And with my credit, no broker on earth is going to give me one of these thousand to one loans. I don’t think I’m the right guy.”
“James, I know about your situation. But I can’t do this without you. I’ll supply the money, you supply the software. We split the profit. Simple as that.”
“You sure this is legal?”
“How can it not be?”
“Man. I don’t know about this.”
“James, what do you have to lose? A few hours of your spare time to write some code and help me fix up the system. Then we turn it on, wait for the magic, turn it off and cash the check. Nobody needs this more than you do man. This would get you all of the way out of the hole. You could get your house back, or get a new house. Get yourself a car. Stop worrying about college bills. Plus, you would be designing the system that does it, you and me. Just like Roth does. But this time, we get rich. We get what we’ve earned from all these years of work.”
Tim had a point. They had both devised systems that could be used for this. All that would be left is really writing a trivial amount of code to catch the opportunity and make the trade. Roth does essentially the same thing thousands of times a day. Why should those guys get all the profit from systems that James designed?
“So, what do you say? In? Are we doing this?”
James considered how happy Melissa would be to get out of debt. All of that stress, gone. No more worrying about money. It had always been about money, all of their worries, all of the stress, and now the court and the collection agents. Just a little bit of code, and we wipe that out in one fell swoop.
“James,” Tim said to knock James out of his reverie.
“Okay. I’m in. But just until we hit our number. That’s it. We just do enough trades to get what we need, for better or for worse, then we’re done. Agreed?”
“That’s the plan.”
“Agreed? Just until we get our number.”
“Yeah man. Agreed.”
James had a muted pang of a feeling, somewhere down deep. Had he just made a deal with the devil? The words of Morpheus rang out again in his mind, You don't know what it is, but it's there, like a splinter in your mind, driving you mad. What was that he was thinking before? Something about Roth, didn’t seem quite fair? He couldn’t put his finger on it. Was Tim’s plan really any different? Was it really any better? Was it just envy that made him feel that way about Roth before? Something was making him feel that way now, just a tiny bit, but now it was about himself.
