The Fear Index

18

The fear in the US markets was going viral, algorithms sniffing and sniping at one another along their fibre-optic tunnels as they struggled to find liquidity. Trading volume in consequence was approaching ten times normal levels: 100 million shares were being bought and sold per minute. But the figure was deceptive. The positions were held for only fractions of a second before being passed on – what the subsequent inquiry called a ‘hot potato’ effect. This abnormal level of activity itself now became a critical factor in the accelerating panic.

At 8.32 p.m. Geneva time, an algorithm had entered the market tasked with selling 75,000 ‘E-minis’ – electronically traded S amp;P 500 future contracts – with a notional value of $4.1 billion on behalf of the Ivy Asset Strategy Fund. To limit the impact on price of unloading so much, the algorithm was programmed to restrict its trading so that its volume of sales averaged no more than nine per cent of the total market at any given moment: at that rate the disposal was expected to take from three to four hours. But with the market ten times its normal size, the algorithm adjusted accordingly and proceeded to complete its assignment in nineteen minutes.

AS SOON AS there was enough of a gap, Gabrielle slid around the gate and set off across the car park. She had not gone far when she heard shouting behind her and turned to see Quarry breaking free of the group and striding after her. Leclerc was yelling at him to come back, but Quarry’s only response was to raise his arm in dismissive acknowledgement and keep on walking.

‘Not going to let you do this alone, Gabs,’ he said as he drew level with her. ‘My fault this, not yours. I got him into it.’

‘It’s nobody’s bloody fault, Hugo,’ she said without looking at him. ‘He’s ill.’

‘Still – you don’t mind if I tag along?’

She ground her teeth. Tag along – as if they were on a stroll. ‘It’s up to you.’

But when they rounded the corner and she saw her husband standing in the open entrance of the loading bay, she was glad she had someone beside her, even Quarry, because Alex had a long iron bar in one hand and a big red jerry can in the other, and everything about him was disturbing, psychotic – the way he stood perfectly still, the blood and oil on his face and in his hair and smeared down the front of his clothes, the fearful staring expression on his face, the stench of petrol.

He said, ‘Quickly, come on, it’s really getting started now,’ and before they had even reached him he had turned and disappeared back inside. They hurried after him, past the BMW, through the loading bay, past the motherboards and the tape robots. It was hot. The petrol was vaporising, making it difficult to breathe. Gabrielle had to cover her nose with the edge of her jacket. From up ahead came a sound like bedlam.

Alex, she thought, Alex, Alex…

Quarry cried after him in a panic, ‘Jesus, Alex, this place could explode…’

They emerged into a much larger room filled with cries of panic. Hoffmann had pumped up the sound on the big TV screens. Aside from the noise of these, a man was ranting somewhere like a commentator in the final furlong of a big race. She didn’t recognise it, but Quarry did: the live audio feed from the pit of the S amp;P 500 in Chicago.

‘ Here they come to sell ’em again! Nine-halves trade now, twenties trade now, evens trade now, guys, eight-halves trading as well. Once again, guys – eight even offer! Seven even offer…’

In the background, people were screaming as if they were witnessing a disaster. On one of the TV screens Gabrielle took in a caption: ‘DOW, S amp;P 500, NASDAQ HAVE BIGGEST ONE-DAY

DROPS IN OVER A YEAR’.

Another man was talking over pictures of a night-time riot: ‘ Hedge funds are gonna try to break Italy, they’re gonna try to break Spain. There is no resolution…’

The caption changed: ‘VIX UP ANOTHER 30%’. She had no idea what it meant. Even as she watched it changed again: ‘DOW DOWN MORE THAN 500 POINTS’.

Quarry stood transfixed. ‘Don’t tell me we’re doing that.’

Hoffmann was upending the big jerry can and pouring petrol over the CPUs. ‘We started it. Attacked New York. Set off an avalanche.’

‘ Guys, we are sixty-four handles lower on the day here, guys…’

Nineteen-point-four billion shares were traded on the New York Stock Exchange during the course of that day: more than were traded in the whole decade of the 1960s. Events as they happened were denominated in milliseconds, far beyond the speed of human comprehension. They could only be reconstructed later, when the computers yielded their secrets.

At 8:42:43:675 p.m. Geneva time, according to a report by the data-feed-streaming company NANEX, ‘the quote traffic rate for all NYSE, NYSE-ARCA, and NASDAQ stocks surged to saturation levels within 75 milliseconds’. Four hundred milliseconds after that, the Ivy Asset Strategy Fund algorithm sold yet another tranche of $125 million worth of E-minis, regardless of the plunging price. Twenty-five milliseconds later, a further $100 million in electronically traded futures was disposed of by a different algorithm. The Dow was already down 630 points; a second later it was down 720. Quarry, hypnotised by the changing numbers, witnessed it happen. Afterwards he said it was ‘like watching one of those cartoons where the guy runs over the edge of the cliff and stays there in mid-air still running until he looks down – then he disappears’.

Outside, three trucks from the Geneva Fire Service had pulled up next to the patrol cars. So many men; so many lights. Leclerc told them to get started. The jaws of the hydraulic cutters, once they were put in place, reminded him of giant mandibles, chomping through the heavy iron fence posts one by one as if they were blades of grass.

Gabrielle was pleading with her husband: ‘Come on, Alex, please. Leave it now and come away.’

Hoffmann finished emptying the last jerry can and dropped it. With his teeth he began tearing at the packet of cleaning cloths. ‘Just need to finish this.’ He spat out a piece of plastic. ‘You two go. I’ll be right behind.’ He looked at her and for an instant he was the old Alex. ‘I love you. Now go, please.’ He wiped the cloth in the petrol that had pooled on the cover of a motherboard, thoroughly soaking it. In his other hand he held a cigarette lighter. ‘Go,’ he repeated, and there was such desperation in his voice that Gabrielle began to back away.

On CNBC the commentator said: ‘ This is capitulation really, this is classic capitulation; there is fear in this market – take a look at the VIX, absolutely exploding today…’

Quarry at the trading screen could barely credit what he was seeing. In seconds the Dow had slipped from minus 800 to minus 900. The VIX was up by forty per cent – dear sweet Christ, that was close on a half-billion-dollar profit he was looking at right there on that one position. Already VIXAL was exercising its options on the shorted stocks, picking them up at insanely low prices – P amp;G, Accenture, Wynn Resorts, Exelon, 3-M…

The hysterical voice from the Chicago pit continued to rant, a sob in his throat: ‘… seventy-five even offer here right now, guys, seventy even bid and here comes Morgan Stanley to sell…’

Quarry heard a wumph! and saw Hoffmann with fire coming out of his fingers. Not now, he thought, don’t do it yet – not till VIXAL has finished its trades. Beside him Gabrielle screamed, ‘Alex!’ Quarry flung himself towards the door. The fire left Hoffmann’s hand, seemed to dance in the air for an instant, and then expanded into a brilliant bursting star.

The second and decisive liquidity crisis of the seven-minute ‘flash crash’ had begun just as Hoffmann dropped the empty jerry can, at 8.45 p.m. Geneva time. All over the world investors were watching their screens and either ceasing to trade or selling up altogether. In the words of the official report: ‘Because prices simultaneously fell across many types of securities, they feared the occurrence of a cataclysmic event of which they were not aware, and which their systems were not designed to handle… A significant number withdrew completely from the markets.’

In the space of fifteen seconds, starting at 8:45:13, high-speed algorithmic programs traded 27,000 E-mini contracts – forty-nine per cent of the overall volume – but only two hundred of these were actually sold: it was all just a game of hot potatoes; there were no real buyers. Liquidity fell to one per cent of its earlier level. At 8:45:27, in the space of 500 milliseconds, as Hoffmann clicked his cigarette lighter, successive sellers piled into the market and the price of the E-mini fell from 1070 to 1062, to 1059 and finally to 1056, at which point the dramatic volatility automatically triggered what is called ‘a CME Globex Stop Price Logic event’: a five-second freeze on all trading on the Chicago S amp;P Futures exchange, to allow liquidity to come into the market. The Dow was down by just under a thousand points.

Time-coded recordings of the open channels of the police radios establish that at precisely the moment the Chicago market froze – 8:45:28 p.m. – an explosion was heard inside the processing facility. Leclerc was running towards the building, lagging behind the gendarmes, when the bang stopped him dead and he crouched down, his arms clasped over his head – an undignified posture for a senior police officer, he reflected afterwards, but there it was. Some of the younger men, with a fearlessness born of inexperience, never paused, and by the time Leclerc was back on his feet they were already running back from around the corner of the building, hauling Gabrielle and Quarry along with them.

Leclerc shouted, ‘Where’s Hoffmann?’

From the building came a roaring sound.

FEAR OF THE intruder in the night. Fear of assault and violation. Fear of illness. Fear of madness. Fear of loneliness. Fear of being trapped in a burning building…

The cameras record dispassionately, scientifically, Hoffmann as he recovers consciousness in the large central room. The screens are all blown out. The motherboards are dead, VIXAL extinct. There is no sound except the noise of the flames moving from room to room as they take hold of the wooden partitions, the false floors and ceilings, the kilometres of plastic cable, the plastic components of the CPUs.

Hoffmann gets up on all fours, rises to his knees then lumbers to his feet. He stands swaying. He wrenches off his jacket and holds it in front of him for protection, then runs into the inferno of the fibre-optic room, past the smouldering and stationary robots, through the darkened CPU farm and into the loading bay. He sees the steel shutter is down. How has that happened? He hits the button with the heel of his hand to open it. No response. He repeats the motion frantically, as if hammering it into the wall. Nothing. All the lights are out: the fire must have shorted the circuits. As he turns, his eyes go up to the watching lens and one sees in them a tumult of emotions – rage is there, even a sort of insane triumph: and fear, of course.

As fear increases into an agony of terror, we behold, as under all violent emotions, diversified results.

Hoffmann has a choice now. He can either stay where he is and risk being trapped and burned to death. Or he can try to go back into the flames and reach the fire escape in the corner of the tape-robot suite. The calculation in his eyes…

He goes for the latter. The heat has become much more intense in the last few seconds. The flames are casting a brilliant glow. The Perspex cabinets are melting. One of the robots has ignited and is also melting in its central section, so that as he rushes past it, the automaton topples forwards at the midriff in a fiery bow and crashes to the floor behind him.

The ironwork of the staircase is too hot to touch. He can feel the heat of the metal even through the soles of his boots. The steps don’t run all the way up to the roof but only to the next floor, which is in darkness. By the crimson glow of the fire behind him he can make out a large space with three doors leading off it. A noise like a strong wind in a loft is shifting around up here. He can’t quite make out whether it is coming from his left or his right. Somewhere in the distance he hears a crash as a section of the floor gives way. He puts his face in front of the sensor to unlock the first door. When it doesn’t respond, he wipes his face on his sleeves: there is so much sweat and grease on his skin it is possible the sensors can’t recognise him. But even when his face is cleaner it doesn’t respond. The second door won’t open either. The third does, and he steps into utter darkness. The night-vision cameras record him groping blindly around the walls for the next exit, and so it goes on, from room to room, as Hoffmann seeks to escape the maze of the building, until at last, at the end of a passage, he opens a door on to a furnace. A tongue of fire races towards the fresh supply of oxygen like a hungry living thing. He turns and runs. The flames seem to pursue him, lighting ahead the gleaming metal of a staircase. He passes out of camera shot. The fireball reaches the lens a second later. The coverage ends.

TO THE PEOPLE viewing it from the outside, the processing facility resembles a pressure cooker. No flames are visible, only smoke issuing from the seams and vents of the building, accompanied by this incessant roar. The fire service plays water on the walls from three different directions to try to cool them down. The concern of the chief fire officer, as he explains to Leclerc, is that cutting open the doors will only feed oxygen to the fire. Even so, infrared equipment keeps detecting shifting black pockets inside the structure where the heat is less intense and where someone might have survived. A team wearing heavy protective gear is preparing to go in.

Gabrielle has been moved back with Quarry to just inside the perimeter fence. Someone has put a blanket round her shoulders. They both stand watching. Suddenly, from the flat roof of the building, a jet of orange flame shoots into the night sky. It resembles in shape, if not in colour, the plume of fire you might see at a refinery, burning off a gaseous waste product. From its base something detaches. It takes a moment for them all to realise that it is the fiery outline of a man. He runs to the edge of the roof, his arms outstretched, then leaps and falls like Icarus.