Rogue Code (48 page)

This move was part of Russo’s secret sauce. Mitri’s sophisticated statistical algo was based on past market behavior to determine optimal sale sizes and price drops, the small trades incrementally squeezing money out of the system and slowing the reaction of other algos with their sheer magnitude. Only collocated algos like theirs would be immune to the delays in getting an accurate view of the NBBO.

The pent-up demand of regular investors now kicked in as the price looked like a bargain below thirty dollars, joining Mitri and no telling how many other high-frequency traders following the same course of action. The impact of the HFTs was greater than they’d calculated but they’d allowed even for that possibility. The price began to rise. A small cheer went up.

Mitri Growth’s special Toptical IPO algo assumed that it possessed an advantage in latency over everyone else, that is, it acted based on the programmed belief that it knew the true price just slightly ahead of everyone else. The increase in HFT trading was pushing the limits of that advantage but Russo and Baker were convinced they still possessed it.

Next the combination of regular investors, both institutional and personal, taken with the high-frequency activity, caused the quotes even to the collocated algos to start to lag behind actual prices, just as in 1929 with the ticker tape. Unknown to anyone until days later, the lag was initially just a second, but it was soon five seconds, then fifteen, then a minute, then three to four minutes.

Nearly all of the HFTs algos immediately moved into a rhythm with the other high-frequency trading algos that were seeing different prices and as was the case in the infamous Flash Crash the price was quickly driven down. In usual trading the New York Stock Exchange applies artificial “brakes” in such a situation, to allow latency to catch up, to permit traders a few moments for reflection or to override their computers, but such safeguards don’t apply to IPOs. This was a free for all and the stock, for now, would be allowed to go where the trading took it.

Toptical rose to $32.43, then at 10:21
A
.
M
. began to fall steadily: $31.19, $30.44, $29.56, $28.23, $28.02, $27.06, $25.37, $24.01.

“My God,” someone said, “look at that.”

$23.46, $22.43, $20.09, $18.33, $12.56, $9.07.

The free fall continued until 10:33
A
.
M
., when the New York Stock Exchange suspended trading. Toptical’s price was frozen at $2.22. Those watching were stunned by what they’d witnessed.

A pall of gloom spread across all trading on Wall Street. The market recorded a loss of 11.2 percent, one of the largest in history. But there was no collapse, no worldwide panic, no end to the international financial market as it was known.

Later that morning, Baker brought Russo the figures. “We made a hundred thirty-seven million dollars,” he said with a grin. “A lot more if you include Toptical, but we have to wait to see what the Exchange does with it.”

“What a collapse,” Russo said. “I never imagined.”

“No, but the code we wrote did. Congratulations.”

83

TOPTICAL

JACKSON STREET

SAN FRANCISCO, CA

10:51
A.M.

Samantha Mason was in her office. She’d seen the writing on the wall much earlier, and left what was supposed to be a celebratory party. She was sitting at her desk, playing around with a game she’d been designing in her free time when Brian came into her office, shut the door, and took a seat.

“How bad?” she asked as she looked up.

“Two twenty-two,” he mumbled.

She could barely hear him. “I’m sorry, Brian. I know how much this meant to you.”

“What happened?” he asked. “I just don’t understand it.”

“I’m not exactly sure. Morgan Stanley did us no favors. They were serving at least two masters, and I think we were the less important one. We may find out it was the Exchange’s new IPO algo. It was buggy. But my guess right now is that it was the high-frequency trading algos. Their greed, and recklessness, finally caught up with them. We just paid the price.”

“Two dollars. How do I go out in public?” Brian said.

“How’s Heather taking it?” Heather was Brian’s former model live-in girlfriend, Sam’s replacement in his life. It was nasty to ask she knew. She didn’t care.

“Heather?” Brian looked at her as if hearing the name for the first time. “I don’t know. We haven’t talked. I think…” He paused. “I just don’t know.”

“We’ve both still made a lot of money, Brian. We’re rich, just not mega rich.”

“I don’t think so. Gordon talked to his people at Morgan Stanley. They think the whole trade’s going to be voided, like it never happened.”

“Wow. That’s something. I didn’t think of that.”

Brian said nothing for some time and Sam left him alone, waiting. “I’ve been thinking,” he said finally. “I hope you’ll reconsider your decision to leave. I need you. We all need you. This IPO thing was a mistake. You were right. I should have listened. We’re back to square one now. We’ve got to make Toptical a sustainable business model. I think together we can do it.”

“I’m leaving, Brian. I’ve had enough.”

“Sam…”

“Listen to me. I don’t want to spend any more of my life on this. I don’t even understand what’s been going on this last year. It simply isn’t what I want to do. I’ve got other plans. I’m sorry not to get the money but I’ve got other dreams, and I’m going to go after them. This—” She gestured grandly.

“—is in my past, even if I’ll still be here for a few weeks or a month or so to help in the aftermath. I still owe some of our people.”

“Sam—”

Just then, Gordon stuck his head in without knocking. “Brian, you’re needed on a conference call right now.”

“What’s going on?”

“Morgan Stanley needs our consent to announce the IPO is canceled. We need to work on the language of the press release.”

“Okay. I’m coming.” Brian looked back at Sam. “I need you.”

“Yes, you do,” she answered. “But I’m still leaving.”

Brian stood motionless for a moment, then quietly left.

Sam sat at her desk without moving until there was a knock at the open door. It was Molly. “Isn’t it wonderful?” she said as she came in and flopped in a chair. “The whole thing just collapsed! Now we get rid of all those finance assholes and get back to building Toptical. I know I shouldn’t show anyone how happy I am—everyone’s so depressed—but I know you understand. This really is the best thing that could happen to us.”

“I guess.”

“You don’t think so?” Molly looked crestfallen.

“I don’t know what I think,” Sam said. “Come on, Molly. I’ll buy you a drink. You’ve been putting in too much time here.”

“Really? At this hour?” Then Molly looked over her shoulder to see if anyone was watching, like a schoolgirl about to play hooky. “Okay!”

84

SAFE HOUSE

RIO DE JANEIRO, BRAZIL

7:07
P.M.

Jeff awoke lying on a bed. He ached across his entire body. The CIA doctor, if that’s what he was, had told him he’d be fine. He’d bandaged three or four places on Jeff’s forearms and neck where flames had touched him, then applied a greasy cream to other spots that gave off an angry glow. The hand Jeff had grabbed the doorknob with was wrapped in thick gauze. The doctor told Jeff to keep the cream applied and watch carefully for infection.

Frank was seated in front of the television in a worn armchair. He wasn’t wearing a shirt and his upper torso was also bandaged, especially around the right side. The television was off, and he was just ending a phone call with his wife.

“How’s Carol?” Jeff asked when Frank disconnected.

“Okay. She knew something was up but not what. She and the kids were glad to finally hear from me.”

“Did you tell her you got shot?”

Frank smiled wickedly. “I’m saving the best for last.”

“I thought the doc wanted you in a hospital,” Jeff said.

“He said something like that, but I told him I didn’t want to risk it even under an assumed name, so it was better to be here. He says I’ll be all right. He just doesn’t want any bleeding to start. I’m supposed to take it easy for a few days.”

“Any word on Oscar?”

“It was a near thing. He was in surgery for four hours, but they think he’s going to pull through.”

“I’m glad to hear that. I guess he’s in trouble, along with Carl.”

Frank stared at Jeff, then said, “You still amaze me at times, Jeff—you really do.”

“What do you mean?”

“We’re using a Company safe house, they got sophisticated surveillance equipment from the Company, a Company doctor is tending us—doesn’t any of that tell you something?”

“What are you saying?”

“Once Oscar and Carl knew the NL was involved, they called it in and got approval.”

“You’re telling me this was a CIA operation?”

“In the end, after a fashion. And the station chief is a very happy man right now. NL had been on the radar for a long time. Victor Bandeira, a really bad guy, is dead. So are his top enforcers, from what they hear. This was a good day for the good guys.”

Jeff absorbed the news. “I’m just glad everyone’s going to be okay.”

“That’s the bottom line. You should know that there’s also been some heat brought to bear on this SEC thing.” Frank had told him about his earlier conversation with Daryl and the evidence she’d uncovered. “We’re no longer suspects. The warrants have been quashed.” Just then, Frank’s phone rang. It was a Skype video call. Jeff heard Daryl’s voice when Frank answered. Frank held the phone out to him. “Someone wants to talk to you.”

Jeff took the phone and saw Daryl’s face on the screen. “Hi,” he said. She was wearing more makeup than usual, and he was sure he could detect scratches. He decided not to ask, not now.

“Hi to you. I see you’re still with us,” she said.

“Absolutely.”

“You’ll have to tell me all about it when you get back.”

“Sure thing. How are you?”

Daryl had not told Frank about Iyers or Campos. She’d save the explanation for when they were together. “Just fine. Tired. Did Frank tell you we stopped the rogue code?”

“He did earlier. But don’t you mean that you stopped it?”

“It was a team effort.”

“Thanks for helping. And it sounds like we can come home soon.”

“Good.” Daryl hesitated, then said, “Jeff, I’ve had some time to think about what happened with us. I want … I want to come back. Let’s do this right this time, okay?”

For a moment Jeff couldn’t speak. “Yes, let’s do it right.” He was almost choking when he said, “I’ll see you soon.”

Daryl smiled. “Can’t wait.”

WHITE HOUSE DISTRIBUTION ONLY

DO NOT DUPLICATE

MOST SECRET

MEMORANDUM

Last week, you asked me to follow up, informally, on some matters resulting from the events surrounding the discovery of the ongoing malware operation in the Exchange’s trading engines and the Toptical IPO. Here’s what I’ve come up with. If you need more detail, just let me know.

I’ll begin with Toptical. As I’m sure you know, it’s been acquired by Tencent, a major Chinese media company.

As I’m sure you’ve also heard, the SEC and NYSE are, once again, considering serious regulation of high-frequency traders. They haven’t got it right in the past, and I doubt they will this time.

The major credit for stopping this unprecedented criminal penetration of the Exchange software goes to Robert Alshon, Senior SEC Investigator in NYC. He’d been on this case for a week. When he saw the IPO going askew, he strongly urged trading be suspended. He’s scheduled to take over the SEC New York Regional Office. We need more like him.

Yes, you were correct. The operation was being run by an organized crime family in Brazil. Our sister agency that handles such matters has been vague on details, but I’m assured we can confidently expect the operation to be shut down for good.

As for Jeff Aiken and Frank Renkin, they had no involvement in the rogue code. They were set up by those responsible. It is regrettable they were ever suspects, but these things happen. I’m assured they just want it all laid to rest.

The actual perpetrator was Abílio Ramos, aka Marc Campos, a longtime and trusted employee of the Exchange IT security department. After learning of the death of the leader of the criminal cartel for which he worked, he elected to cooperate in exchange for a reduced sentence. He managed the fraud with the assistance of just one other in-house employee, Richard Iyers. Iyers was found murdered in the alley not far from the Exchange. Police don’t know if this is a coincidence or related. There are no suspects.

All in all, what we have is a satisfactory ending to what could have been a very messy outcome. I’ll be in D.C. next week. Let’s get together if you have time.

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BOOKS

Arnuk, Sal.
Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio
, FT Press, 2012.