by Davis Bunn
Added to this was the need to watch the markets. Wall Street opened down, fell further for the first hour and a half, then began to steadily make up at least some of the lost ground. By midday Esther was fairly certain her predictions had proven correct. Jasmine called an hour later to congratulate her for, as she put it, boosting the bank’s bottom line.
Esther drove straight from the lawyers to the clinic, where the duty nurse told her that Dr. Cleveland had been called away on a personal matter, but that he very much wanted to speak with her as soon as he returned. Esther counted the doctor’s absence as an unexpected gift. She spent time with Nathan, then spoke by phone with Craig, who promised to stop by later. He actually laughed out loud when Esther asked if the girls were free to join them.
Then the realtor for Nathan’s home called to say she had received the formal contract. Esther drove to the realtor’s office and signed the papers, both relieved and saddened. Next it was time for her to leave for the television studio.
Esther was parking her car when the phone rang again. She answered it, and Jason’s assistant said, “Glad I caught you. Reynolds Thane would like a word.”
She waved to where Craig and his girls were climbing out of their car. “Sorry. No.”
“I know you’re on vacation, Esther, but you really need to take this call. Jason was on the trading floor with Mr. Thane when the wall monitors flashed an alert about your doing another televised interview. I saw them. Reynolds did a better job at hiding his reaction, but I can tell you they were both extremely displeased.”
She turned toward the west. The late-afternoon sun cut silhouettes from a stand of tall pines. “Tell them I resign.”
“Excuse me?”
A flood of reasons and logic poured in now. “It’s time.”
“I’m sorry, I don’t . . .”
“It’s very simple,” Esther said. “I quit. Effective immediately.”
She put her phone away and stood studying the trees turned luminous by the descending sun.
“It had to be done,” she said softly.
Craig had overheard her side of the conversation. To his credit, he did not question her actions. He merely asked, “Are you all right?”
She turned to face him. “I’m fine.”
And she was.
Suzie McManning watched Esther seat herself under the lights and greeted her with, “Some of the pundits you proved wrong with your analysis yesterday are not pleased.”
“I suppose that’s inevitable.”
“They want you drawn and quartered, burned at the stake, and made to walk the plank. In that order.”
A man behind the cameras said, “We are live in three minutes.”
Suzie checked her reflection in a hand mirror from the pocket of her jacket. “Sure you don’t want makeup to check you over?”
“I’m good. Besides, you’re the star.” Esther liked the woman’s smile, smooth and confident, a glow about her that served as a magnet on camera. “Are you going to hit me with another unexpected shot today?”
“If I can. It brings out the best in you.”
“I’m not sure about that.”
“I am.” Suzie straightened the lapels on her jacket. “That suit looks great on you. What is it?”
“Ralph Lauren.”
The man in the shadows behind the cameras wore a single-ear headset with a plastic mike. He lifted the clipboard and said, “Sixty seconds.”
Suzie shot her a look, and Esther had the impression it was the first time she’d gotten a glimpse beneath the professional veneer. “Everybody around here is talking about what you said to New York. We’re still waiting for their decision. Just so we’re clear, either way, I owe you.”
The man said, “We are live in three, two, one . . .”
“We have experienced another turbulent trading period,” Suzie McManning began. “At its lowest point, the Dow plummeted 1,114 points in heavy trading. But by today’s close it had regained almost 400 points. With me now is Esther Larsen, senior analyst with CFM. Esther, how can you help our viewers make sense of this?”
She started to correct Suzie, to explain she was no longer employed by the bank, but then realized she should have mentioned it beforehand. Now it would have to wait.
Suzie caught her hesitation and smiled. “Hard to know where to begin.”
“Actually, it’s tragically simple,” Esther said. “Since yesterday’s dive, most analysts have been pointing at the situations in Japan and Spain. But they are merely the triggers. The real problem is what has been growing in the shadows.”
Suzie nodded, which surprised Esther. “You are speaking of the electronic trading system that operates outside Wall Street’s traditional boundaries.”
Esther leaned forward slightly. “You’re worried too, aren’t you?”
“Anyone who studies the markets would have to be,” Suzie said.
“I’m not talking about just the past two days.”
“And neither am I.” Suzie’s smile remained comfortably in place. “Answer the question, please.”
Esther supposed some people would find Suzie’s methods to be offensive. But she liked it. Two concerned women, discussing issues for which there wasn’t enough time.
“Over the past nine years there has been a huge upswing in electronic trading,” Esther said.
Suzie interpreted that. “Trades that happen between one financial institution and another, with total disregard for Wall Street’s system of controls.”
“That is correct. It’s not just the size of these trades that has created concern, but the speed. Market overseers now know that a growing number of financial groups are applying algorithms originally developed for the derivatives trade to the stock market.”
“To remind our viewers, algorithms are formulas used to interpret mathematical data in real-time situations, such as linking us to our computers.”
“Nowadays these electronic trades are referred to as algos,” Esther said. “The growing trade in algos has become a real enemy.”
The seven men and six women Talmadge had drawn together were seated in two rows of folding chairs at the studio’s far end. All Esther could see of them were fourteen motionless shadows. Craig and his daughters stood clustered to their right. The Exit sign illuminated Craig’s arms draped over their shoulders, holding them close. Esther found it far easier to direct her words to the girls. If she could make it clear to them, perhaps the audience would understand the urgent need. And then act while there was still time. Perhaps.
Esther went on, “Every major investment banking division now operates computer-driven stock trades. Their algorithms are designed to respond to set conditions. For example, they might say if the stock market declines fifteen percent in one trading day, the computers will then sell every share the bank owns.”
Suzie asked, “Can you give us a real-world example?”
“Sure. Some of these highly secretive actions have become public knowledge through court documents. For example, four years ago Citigroup devised a program they called Dagger that compared the price difference between identical shares of the same company on two different markets, say, Tokyo and New York. Whenever a discrepancy was identified, the program immediately bought hundreds of thousands of shares on one market and at the same time dumped these shares on the other. The difference in price was a matter of pennies. But the result was a wild swing in the company’s value. And no one knew what was going on until it was over.”
Suzie asked, “How fast would such trades happen?”
Esther nodded. That was the issue. “Too fast for a human to counteract the order.”
“You’re saying that, in a crisis, these computer systems might dump shares in a heartbeat?”
“Oh, no,” Esther replied. “A heartbeat is far too slow a measurement.”
Reynolds drove the sunset streets toward his home in Myers Park, listening to yet another discussion between the bank’s former chief analyst and Suzie McManning. Esthe
r Larsen’s casual rejection of his command to appear had shocked him. Reynolds tried to tell himself that Larsen had merely become addicted to the limelight and saw herself building a public profile. But in truth he thought it was something else entirely. Larsen had sacrificed her position with the bank in order to speak her mind. She was passionate about her concerns. She felt this was her duty.
There was nothing so dangerous as an individual with a cause.
Reynolds listened as Esther Larsen drew closer to his and Sir Trevor’s true aims with every word she spoke. He clenched the wheel at the sudden sensation of her breath on his neck.
He jerked in surprise when his phone rang, cutting Larsen’s next comment off in mid-sentence. The car’s screen showed a blocked number. “Yes?”
“It’s Jason. I thought I should check in.” The man’s normal air of aggressive fury was gone, replaced with an uncharacteristic uncertainty. “You know, just in case . . .”
“Nothing’s changed.”
“You’re absolutely sure. Because once this thing gets set in motion—”
“Jason, I want you to listen very carefully. Do. It. Now.”
Jason breathed hard, twice, three times, then said, “They are putting things in place as we speak.”
“Good.” Reynolds cut the connection and then turned off his radio. Punch the right button, silence the pesky woman for good. It was that simple.
41
Esther felt more intensely than ever the audience beyond the cameras. She told Suzie, “When investment banks started their algorithm-based trades, they instantly discovered that the standard fiber-optic communication systems slowed them down.”
Suzie emphasized, “The fastest communication systems in the world were too slow.”
“They were the fastest, but they’re not any longer,” Esther replied. “Remember what we talked about earlier, the defining trait of all investment banks?”
Suzie was ready for that. “They operate cross-border.”
“For these financial institutions, national boundaries don’t exist. That is why downturns like today’s are no longer restricted to one nation.”
“How does this tie to algo trades?”
“The trader who gets in and out first makes the biggest bucks. For these computer-driven algo systems to operate, the banks needed faster communications. The fastest bank to act was the one making the biggest profits from each trade. So they laid their own undersea cables. Then these owners were beat out by banks who bought satellite bandwidth.”
“Which I assume most of these big traders are now using,” Suzie said. “What is faster than that?”
“Nothing. Yet. That is why some algo traders started cheating. Circumventing the standard system with its checks and balances, inserting their algorithms into the communication links between markets, telling their computers to respond instantly to shifts in market trends.”
Esther could hear the tension building in her voice, the acceleration of her words, the intensity of her fears. Suzie caught it as well. Her own voice dropped an octave. “Tell our audience why this is so crucial.”
“Speed,” Esther repeated. “The time frame has become so small, there’s no room for human input. Which means there are no brakes.”
Suzie moved in tight. “That is the crux of the matter, isn’t it? The speed.”
“The banks have put in place a system that interacts with other systems. Independent of humans. Free of legal checks and balances. All this is kept highly confidential. Investment banks and hedge funds don’t want outsiders interfering in their profits. But the few non-bank mathematicians who have had a chance to study these algorithms say they have now taken on symptoms of what is known as emergent behavior.”
Suzie nodded once, but did not speak.
“Emergent behavior is one component of a biological system. An independent system. In this case, one system will structure its algorithms around the command that if blue-chip stocks sink by, say, five percent, it sells all high-risk stocks. This sets up an alarm in a second system, which then sells all the bonds in their portfolio holding junk status. This alerts a third system, which sells every European stock the bank holds. Then a fourth, and a fifth, and a sixth.”
Suzie asked, “And all this happens how fast?”
“All six events can take place in the span of three seconds,” Esther answered. “Perhaps less.”
“And these trades hold how much value, Esther?”
“Billions.”
Suzie nodded. “Can you give us at least one example, sort of put flesh to the bones?”
“Right. Court records recently revealed that in 2011, US banks made fifty-five billion dollars from credit swaps, a form of derivative trading that relies on this kind of speed. That sum represented thirty-seven percent of all the profits made by the banks during that period.”
“So what you’re saying is that these trades are now large enough to create the sort of downward spiral we viewed today.” Suzie leaned back. “We’re almost out of time. Esther. What measures can our viewers take to halt the next downward spiral?”
“Write to your congressman and senator and our president,” Esther said. “Urge them to institute three new laws. First, regulate the hedge fund industry just like they do banks. Second, establish caps that limit the speed and scope of the algo-trading system. Insulate the economy from these institutions and their absurdly dangerous behavior. Third, require all financial institutions to spin off their investment banking arms. This was proposed after the 2008 recession and championed by two recent presidential candidates, Mike Huckabee and John McCain. In response, lobbyists representing the financial industry spent over a hundred million dollars pressuring Congress. The proposals were quashed. The bills never went forward.”
“A hundred million,” Suzie repeated.
“In a good week, they make that back.”
“In a bad week?”
“We only need to look back to 2008 for that answer,” Esther said. “We all pay. And one thing more.”
“Yes?”
“Stop feeding the beast,” Esther said. “Do no business with any financial institution that trades in derivatives.”
“But wait a minute. Your own bank has a huge derivatives portfolio.”
“It’s not mine anymore,” Esther replied.
“Excuse me?”
“Before coming on the air, I resigned.”
Talmadge’s staff had set up a catered buffet in a disused studio. When they entered the vast windowless chamber, Esther found starched tablecloths covering banquet-style tables, comfortable chairs, even some tall standing lamps. A trio of monitors showed the nightly market report. The buffet contained a delectable array of choices. Most of the station’s employees drifted in also, filled plates, and returned to their work. At Talmadge’s invitation, Craig and his daughters and Suzie and the station manager joined them at the central table.
The room went silent when the Far East markets again opened sharply down, but Esther was not worried. At Talmadge’s request, she stood and explained how the markets responded to panic first, reason second. As she fashioned the words, her tremors returned, as though she were resonating to a concern that her brain had not yet managed to fully shape.
Esther pointed out how the US aftermarket trading remained stable, meaning the floor established by the major hedge funds had not been breached. The nation’s markets were not entering free fall. They were safe. This time.
The entire studio went quiet when the news channel re-aired Esther’s earlier comments. Both times the program switched from her to gatherings of financial pundits, who responded furiously. Their voices were caustic, their comments vicious. It sounded to Esther as though they were mortally offended. As though she was personally liable for shaking the markets. They called her deranged. Deluded. Spastic in her knee-jerk responses to what they considered normal trends.
Three seats away, Abigail sniffed loud enough for Talmadge to notice. As Craig hugged his younger daughter,
their host leaned forward and said, “Don’t you worry about them, missie. It’s part of being right.”
“They’re just so nasty,” Abigail said.
“They’re afraid of the lady here.”
From Abigail’s other side, Samantha was fuming. “They don’t have to talk like that.”
“They got on air by being spiteful. And you know what? The louder they shout, the more folks they drive our way.”
Abigail stared at Esther. “But what if they’re right?”
Esther’s own response was cut off by Suzie McManning speaking from the table’s far end. “They’re not. I know those people. I’ve listened to them for years. And one thing you can say about them all. They got where they are by looking backwards. They base their analysis of tomorrow on what happened yesterday. Esther is saying something different. She’s saying the old model doesn’t work anymore. There’s a new structure in place. And it’s putting our nation’s economy in real danger.”
“There, you hear that?” Talmadge leaned back in his seat. “That’s why we’re here. To try to stop that train before it runs us all over the cliff.”
Esther knew Talmadge had used the young girls’ concerns as a means of stifling protests that might have arisen from their would-be investors. She knew he was strategizing with every breath. She also knew if it were possible, he would profit from any coming downturn. But it did not impact her growing affection and admiration for the man. He was cantankerous, conniving, and manipulative. But he also possessed a good heart.
Esther faced the two girls. “When I first discussed this issue with your father, he asked me why I was so concerned. Why did I want to become involved? Who was I doing this for?”
Gradually the table went quiet. Esther kept her gaze focused on Samantha and Abigail as she said, “The answer is, I’m doing this for you.”
Craig smiled briefly, first at her and then at his daughters, and settled his arm around the back of Abigail’s chair.
