Rigged Chapter 10

"Stalking"

by

Ross M. Miller
Posted July 12, 2004

There is nothing like a confrontation on unfamiliar turf to get one’s adrenaline pumping. As psyched as I was for the morning meeting, this was ten times more intense because I was in charge. I always knew in the back of my mind that there was something overwhelmingly addictive about gambling, but I had nearly forgotten the physical experience of the rush.

My body’s chemical reaction triggered a program inside my brain. I knew that this particular altered state of consciousness made me more susceptible to taking unwise risks. Before I said anything or did anything, I would think at least twice. Whenever I sat down at a table with opponents who I had never encountered before, I always made it a point to delay any significant bets until I had a feel for how they played. I had taught myself the discipline to fold even the most promising cards early in the evening when I did not know what I was up against and I would then use the opportunity to watch rather than risk my own money. If I did not like what I saw, I either bided my time or simply got up from the table and walked out.

The main entrance led to a vast circular atrium built around what might charitably be called a water sculpture. A ring of chrome jets sprayed a circle of water from the ceiling down to the floor forty feet below where drains and a hidden network of pipes circulated the water back to the top. Despite the sculpture’s questionable aesthetics, it was a very effective white-noise generator.

The four of us walked clockwise around the atrium past a bank, a chocolate shop, and a shoeshine stand to the desk that guarded the elevators. Our GFF IDs got us past security with no questions asked and we crowded into an elevator that took us to the Lowell reception area on the twenty-second floor. Once there, we were whisked into a conference room on the twenty-third floor. The Lowell Group used interior spiral staircases instead of the main elevator bank to speed movement between its three adjacent floors.

As was my habit, I looked for surveillance cameras as we proceeded through the building and thought about where I would hide a microphone in the conference room. I knew that it was common to bug meeting rooms in situations like this and I could not trust Lowell to resist the temptation. Visitors usually talk among themselves about an upcoming meeting while waiting for it to begin, providing hosts who monitor them with valuable information. We limited our chatter to an appreciation of lunch.

It was several minutes before Lloyd Perkins walked in the door and said, “Oh, you’re here. I hope you haven’t been waiting long.”

“We’re fine,” I said and then went through the introductions. Oddly, Lloyd gave Tara no special notice, paying more attention to Randy. When introduced to Zero, he remarked, “Zero? What kind of name is Zero? Didn’t your parents like you?”

“Not particularly, now that you mention it,” Zero replied, eliciting a nervous laugh from Lloyd that sounded more like a cough.

“My assistant is still gathering up the rest of the group, so I thought I’d take you to our trading facility in the meantime,” Lloyd said before leading us up another spiral staircase and onto a trading floor. I was not impressed with the facilities—even the tiniest hotel casino was considerably larger—nor was the rest of my party, though we acted as if we were to be polite. (Well, except for Zero.) The trading floor occupied almost a quarter of the twenty-fourth floor, but it was nothing more than several rows of computers, keyboards, and displays with young men—most of them in their twenties—sitting or standing in front of them.

The only notable thing about the trading floor was its view of Boston Harbor and Logan Airport. The water and air traffic was far more interesting than anything that I could conceive of happening on the trading floor itself.

At the end of each row of the trading floor was a plasma television and they were all tuned to GNN. To maintain the dignity of the trading environment, the sets were silent; however, the closed captions tipped off the dialogue. While Lloyd touted the floor’s advanced technological capabilities, I watched a mangled version of Sally Santorini’s words scroll down one of the screens:

This nose in from the
new hawk stock exchange—
the exchange wilt not open to day
oafish owls are uncertain a boat 
tomb arrow’s hope pinning time a swell.

 As I was catching up on current events, Zero was casing the joint, Randy was browsing the traders’ screens, and Tara was entertaining the troops.

Randy came over to me to see what had caught my eye on GNN. “Nice talking head. I think I’ve seen her somewhere before; but when I watch her, her words make sense. Does GFF make karaoke machines? I hope not.” What Randy left unsaid was that the speech-recognition algorithm the Pixels developed for their robots ran rings around any commercial system, including the one used to translate Sally’s voice into captions in real-time.

The guys on the trading floor seemed less boisterous than Oliver Stone would have led me to believe. It was easy to imagine the traders, oars in hand, propelling their vessels across the North Sea or down the Charles River. Many of the seats were empty and with the announcement that the markets would not open until the next morning at the earliest, I noticed a few traders sneak toward the exits.

Normally, I doubt that our presence would have gotten much attention—Lowell’s largest investors must visit the trading floor all the time—but it was clear that we had become today’s main attraction. Actually, it wasn’t so much us as Tara. She had sufficiently distracted the traders that Zero was able to set himself up at a trader’s desk on the far side of the floor and give himself a “computer demonstration.” I hoped that The Lowell Group would not find itself with a warehouse full of pork bellies at the end of the day.

Lloyd’s assistant—a middle-aged woman with fine brown hair and a North London accent who was never introduced to us—arrived to take us back to the conference room where the others were waiting for us. It was a bit past two o’clock.

“Ken’s still stuck in New York, so we’ll have to manage without him this afternoon,” said Lloyd. He then handled the introductions himself. “I’ll start by introducing the portfolio management team. Harvey Anderson runs our sector funds—Lowell Biotech, Lowell Semiconductor, and Lowell Telecom to name a few. Stan Childs takes care of index funds. Fred Avery runs our income funds. And, finally, Ogden Wigglesworth handles our various tax-advantaged funds.”

Harvey, Stan, Fred, and Ogden were all roughly the same age as us—middle to late thirties—and, like Ken, were fancier dressers than the group I met at breakfast. All their colors were muted and textures were big with these guys. The seating arrangement and body language indicated that Harvey was leader of the pack in Ken’s absence. Harvey did not quite possess a linebacker’s physique—though he might have been passable at an Ivy League school—but he certainly had the neck, haircut, and temperament. His counterparts were more like tight ends, unimposing and difficult to pin down.

“On the support side,” Lloyd continued, “We have Lars Boylan, our director of research, and Karen Aldrich, our head of information systems. I think that the seven of us can handle your queries.” He wanted to make sure we realized that we were outnumbered.

After taking a close look at Lloyd’s people, it struck me that I had seen Lars before. A most amiable sort with blond hair, blue eyes, and a big smile, he was one of several guest commentators that GNN brought on to anoint their viewers with valuable stock market insights. His title was wishful thinking—he had no research staff working for him because each portfolio managers had his own research team. Lars was a marketing guy in drag.

Karen appeared less amiable. Choirboy thin and caffeine nervous, she looked tough enough to contend with the portfolio managers and traders who made demands on her and her staff. Karen’s hazel eyes were constantly darting, giving the impression of someone who really wanted to be somewhere else, not that any of the Lowell people, with the possible exception of Lars (who was probably just better at putting on an act than the others) really wanted to deal with anyone from a corporation that they would rather forget now owned them.

My attention then turned to the room itself. The conference table, shorter and less ornate than the one at wharf boardroom though still impressive lumber, barely held all eleven of us. Lloyd sat at the head of the table and I occupied the far end. The opposing teams sat together and the visitors were once again given the seats with the best views. Like the trading floor directly above us, the conference room looked out over the harbor.

After their introductions were complete, it was our turn. I simply introduced myself as the “leader” of our group and let the others introduce themselves. Randy said that he was in “artificial intelligence” and Zero mentioned “systems and security,” which were innocent ways of describing what they really did. There was no way of Tara getting around her being an astronomer, but there were several of them in Boston’s financial district and many times more on Wall Street, so any raised eyebrows had nothing to do with her profession.

“Well then, you must be enjoying your visit to the hub of the universe,” Harvey said to Tara after she completed her self-introduction in an obvious move to score points.

“Actually, my family is from around here. And according to the elder Oliver Wendell Holmes, it’s only the hub of the solar system, and he was referring to the State House and not to the city itself.”

Harvey dropped the subject and ceded the floor to Lloyd, “So, what can we tell you?”

I spoke up immediately. “What’s the difference between what you portfolio managers do and what the traders upstairs do?” It had not escaped me that no traders were in on this meeting. Rather than point this out directly, I thought I’d see the reaction to my mentioning them.

Lloyd said, “The portfolio managers figure out what to buy and sell. The traders execute the necessary transactions for them.”

“So the traders do the shopping and handle the returns.”

“I guess that you could put it that way, though I wouldn’t,” Lloyd responded while tapping the fingers of his left hand on the table in front on him. “The word ‘returns’ has a different meaning around here.”

“Why do you need people to do the shopping, aren’t the prices of everything posted on the computers?”

“Maybe for the kinds of transactions that you might do—a few hundred shares here and there—it would not be worth having traders around, but we’re buying and selling millions of shares. We look at things in terms of average daily trading volume. Many of our positions not only exceed the total number of shares that a stock trades on a typical day, they can exceed what’s traded in a week. You can look at all the computer screens that you want. You won’t find anyone willing to announce his intention to buy or sell that kind of volume.”

“Why not?” I asked.

“It would move the market too much. In such cases, we have only two choices. We can dribble the shares out or we can find someone willing to take big chunks. That’s what traders do.”

“Could you consider a hypothetical case for me?”

“If it’s not too hypothetical,” Lloyd said, displaying some resistance.

“I’ll try to keep it real. Let’s say that one of your portfolio managers wanted to purchase a million shares of GFF stock. When we were upstairs, I saw that a bunch of shares were trading at twenty-four-and-a-half dollars per share. How would you go about buying them?”

“First of all, except for our index funds—which have a waiver from the SEC—we aren’t allowed to purchase stock in our parent.” Lloyd said this in a condescending tone, implying that he wondered what I was doing here if I didn’t already know that trade in GFF shares was verboten. I was happy to make him feel superior. He paused to let the condescension sink in before going on: “But I’ll ignore that little detail for the sake of your example. Fortunately, a million shares of GFF isn’t that much stock—it’s less than a tenth of the average daily volume. Still, it’s enough that it might be difficult to buy the shares without driving the price up, possibly close to twenty-five bucks a share. On a bad day. Then again, there might be a big seller out there. Then, we could get the shares at a discount. The problem is that there might be a good reason why someone else is eager to sell.”

“They know something that you don’t?”

“Precisely,” Lloyd said. “And, of course, any seller may be suspicious of why we are buying. What do we know that they don’t? Furthermore, all trades are done anonymously. Brokers don’t tell you who you are buying from or selling to, but word often gets out.”

“Can’t you do a head fake to fool the market? Start by selling a stock you want to buy or vice versa?”

“You’re catching on.” More condescension from Lloyd. “But that rarely works. A good trader knows when its best to try to leg into a position slowly and when to jump in with both feet. It’s more art than science.”

“Can’t the traders decide what to buy and sell on their own?” I asked, even though I could guess the answer.

“No. Our traders only aim at the targets put up by the portfolio managers. Like every other investment manager, we have controls in place that eliminate the possibility of rogue traders, like that guy who brought Barings down several years ago.”

Keep talking folks, I thought. I like the sound of “rogue traders.” I resisted the urge to shoot a glance over to my colleagues.

Karen now had her head in the meeting. “We have a back-office staff that is completely separate from the trading operation,” she said. “They track everything the traders do. Electronic transactions are automatically logged and phone calls with brokers are taped, both here and on the broker’s side, to help resolve any misunderstandings.”

“Does each portfolio manager have his own group of traders?” I asked.

This question must have been harder than I wanted it to be as it took a while for an answer to materialize. Lloyd finally said, “Well, yes and no. Mainly no. Let me explain. Each trader covers a sector of the market and some of the sectors correspond to one of Harvey’s funds. But that trader can also trade for other portfolio managers. And, of course, many traders cover sectors where we don’t offer a fund, at least not yet. We like to roll out one or two new sector funds each year. We have a new gold fund in the works and a few more on the drawing board.”

“How do you grade the performance of your traders?”

Harvey fielded this question. “I can assure you that all of our traders are excellent performers, some of the best in the business. An outside consulting firm—the recognized expert in its field—analyzes all of our trades and they generate weekly report cards for the traders. They compare the prices our traders get on a given day with everyone else in the market and they rank consistently in the top decile.”

“Can we see those reports?”

“That’s a lot of paper,” Harvey said.

“Not all of them, then, just a sample. Say one for the first week of the month going back a year.”

Karen responded, “We can do that. Sure. Just not today.”

“First thing tomorrow morning is fine with us,” I said, looking to see how far she would push back.

“We’ll try. But certainly something should be available by noon.”

“Do those report cards cover all the trades?”

“Every one,” said Karen.

“And the fund that made the trade?”

“No. The report cards don’t track that. We only care about a trader’s aggregate performance. We see no need to break things down by fund.”

“Is there a way that we can get that information?” I asked. “You must have it in your computers.”

“Yes, of course, it’s there. We’re required to track every trade. But that information is spread over three databases and there’s no direct way to generate that report. The reports that we can pull from our databases are structured around the needs of the portfolio managers and traders. The portfolio managers only want to know how their own funds are doing; they don’t have the time to pore over every trade. The traders are trying to get the best price on each trade regardless of the fund.”

“But we can still get at the underlying data, can’t we?” I asked.

“Yes, the data is there. But different groups from IT designed each database and there are numerous incompatibilities in their architectures. We plan to consolidate them at some point, but that takes time and money.” Karen looked at Lloyd as she said this, but he failed to acknowledge her. “It might take weeks, possibly months, to create the reports that you’re asking for.”

I thought that it was best to drop this subject and move on. I had only made the request to gauge their level of cooperation. I had to hope that my team could do things in a fraction of the time that it would take Karen’s people. Now for an easy question: “How do you determine which funds to offer? There are lots of sectors, indexes, and so on.”

“The market tells us what to do,” Lloyd replied. “We run several 401(k) plans and when something becomes hot, we have to offer it or risk losing business. Our research staff already has all the bases covered; it’s just a question of what the clients want. And whatever they want, we provide it.”

Randy felt that this was a good time to join the conversation and given that I was starting to come off as the bad guy, I was happy to let him contribute. “Where are your marketing people?”

Randy’s fellow blond replied, “They’re on the wharf, but I work closely with them. I’m happy to ring them up and try to get someone over for this meeting.”

Lloyd’s eyes grew larger. He knew that this would buy time and I was happy to give it to him.

“Go right ahead,” I said.

Lars grabbed the phone that was next to him on the conference table and placed the call. After a brief conversation to find out who was available and when, he said, “Someone will be over in half an hour.”

Lloyd said, “I’ve got business to tend to and suggest that we take a break until marketing arrives.”

“Fine, I need to pick up a few things at the drugstore,” I said, looking at Lloyd with one eye and at Randy with the other. “We should be back within the half hour.”

“I need some stuff, too,” Randy said.

“You know about the store over at Post Office Square,” Lloyd said. “I think we can let you back in the building.”

Randy and I headed for the elevators, while Tara and Zero stayed behind. Although it was obvious what Randy and I were up to, having all four of us leave together would have looked overly conspiratorial. Furthermore, Lloyd’s crew might be more forthcoming with Tara and Zero in our absence. We took the elevator down to the lobby, walked out of the building, and talked trash on the five-minute walk to the drugstore. I suspect that the weather was still lovely, but I was too preoccupied to notice.

Copyright 2004 by Ross M. Miller. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to RiggedOnline.com.