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.”
“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.
Esther went on, “I can’t focus on a million families out there who have been put in danger. Doing this for the right reasons has meant doing it from the heart. And you’ve taught me that.”
Abigail said, “We didn’t do anything.”
“You were there when I needed you,” Esther replied. “I’ve lived by the law of self-sufficiency. What I need, I buy. What I have, I earn. But this action is taking me on a completely different course. You and your sister are helping me come to terms with what that means. I’m doing this because I care for people I’ll never meet. I want to help them. I want to keep them safe.”
Esther turned to the rest of the group and wondered at the changes in herself. Allowing her to be open to strangers. She finished, “Even when that means doing what comes hardest for me.”