Short Sold (The Arab Heist)

Short Sold

The Arab Heist

Smashwords Edition

Copyright 2016 Robert Joseph Geraldie

All rights reserved. Without limiting the rights under copyright law, no part of this publication may be reproduced, stored in or introduced into a database and retrieval system or transmitted in any form or any means (print, electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the owner of copyright. All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental. This ebook may not be re-sold, leased or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each person. Thank you for respecting the hard work of this author.

In memory of Staff Sergeant RJ Geraldie (24th Battalion)

Editorial Assistance: Dr Kayt Davies and Dr Joanne Davis

Cover Art: Verba Aurum

An e-book edition of this title is available on www.smashwords.com

Contact Robert: www.geraldie.com

Friend Robert on Facebook: https://www.facebook.com/robert.geraldie

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Synopsis

Drawing deeply on real events, Short Sold is an intelligent financial thriller about a devilishly canny banker who cannot believe his good fortune with the fall of the Gaddafi regime. Short Sold recounts the period before a disenchanted young Tunisia man self-immolates, to the months after Gaddafi’s enigmatic death.

Jonathan Penney, the Managing Director of a London hedge fund and the private banker to the Gaddafi family, drags the innocent and guilty alike into his nihilistic schemes, as he steals billions of dollars from Libya amidst the ‘Arab Spring’.

Penney is at the top of his game, and the fragile Middle East and conflict in Libya means that there is inordinate wealth on the move. The challenge is to outfox others trying to conceal them. Dodging Libyan assassins, ingenious hackers and the lumbering threat of government interference, Penney and his team travel the world playing the system, leaving behind a stream of chaos. Some escape the avarice of the world of high finance, whereas others spiral into the vortex of extreme greed.

At the close of the turmoil proceeding the Arab Spring, a new word will enter the lexicon, and it will be the Arab Heist. The Arab Heist is the next great financial catastrophe in waiting and possibly the largest theft in history. It will carry the double burden of more than just economic consequences, as it will shackle nation building and drive discontent. As idle young men roam Libya’s streets, unwilling to relinquish their gun for a hammer, there is a race for the new government to harness their hopes, before subversive elements harness their betrayal.

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The Author

Author Robert Joseph Geraldie is as colourful as his characters. Fresh from completing a Doctorate, he set his sights on the world of high finance, and became one of Australia’s sharpest boutique private equity managers. In his spare time, Robert has learnt Mandarin, travelled widely, with a flair for exploring ancient cities. He has an interest in geopolitics and the workings of financial markets.

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The Acknowledgements

As any author knows, a novel is never written in isolation and there are many people who played a vital role in getting this book to you. I first need to give special thanks to Dr Kayt Davies and Dr Joanne Davis for their invaluable assistance at all levels. Secondly, I must acknowledge the services and guidance provided by Writers Victoria, as their skills and advice contributed greatly. I also need to thank my parents their support. Finally, I have to acknowledge the many sources of valuable information that made this book possible. These include, WikiLeaks, the Diplomat, Foreign Affairs Magazine, the Guardian, the CIA, Al-Jazeera, the BBC, the Australian Broadcasting Corporation, the Daily Mail, Al-Arabiya, The Times, and the multitude of leaked U.S. Military and government files.

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Chapters

Facts

Chapter 1 - Penney in the City

Chapter 2 – Sharp’s Beautiful Mind

Chapter 3 - Targeting the Banks

Chapter 4 - Giving More than Taking

Chapter 5 - A Jewel to Behold

Chapter 6 - The Greek Bank Job

Chapter 7 - The Aftermath

Chapter 8 - The Proposal

Chapter 9 – The New Elite

Chapter 10 - The Deal Maker

Chapter 11 – An Offer on the Table

Chapter 12 – The Kill

Chapter 13 – A Meal Fit for a King

Chapter 14 – It’s the Cats Fault

Chapter 15 - An Inconvenient Man

Chapter 16 - Uprising

Chapter 17 - Stevens I'm being Followed

Chapter 18 - An Expected Guest

Chapter 19 – Hiding an Elephant

Chapter 20 – A Magical Sheep Paddock

Chapter 21 - A Holiday to Nowhere

Chapter 22 - A Night at the Theatre

Chapter 23 - I Think You Do Know

Chapter 24 - Our Man in Tripoli

Chapter 25 - Slay them all God knows his Own

Chapter 26 – Every Man Has His Price

Chapter 27 – Alert on the Screen

Chapter 28 - Fooling the Devil

Chapter 29 - The Taxi to Freedom

Chapter 30 - The Myth of the Man

Chapter 31 - The Theatre of the Absurd

Chapter 32 – We’re the One Percent

Chapter 33 – A Well Dressed Stunned Rabbit

Chapter 34 – It’s All Gone

Chapter 35 – The Red Brick Building

Chapter 36 – The Arab Heist

Chapter 37 – Colonel Gaddafi’s Epitaph

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Facts

• - Shortly after the Libyan people revolted against the Gaddafi government, several new hedge funds and private investment banks opened in New York, Berlin, Milan, London, and other major trading centres.

• - The origin of the money in these funds hides under layers of trusts, shell corporations, front companies, and tax haven bank accounts.

• - The managers of these funds had known, or suspected, professional ties with the Gaddafi regime.

• - Colonel Muammar Gaddafi and his children attained enormous wealth, almost exclusively from siphoning money from the sale of oil to Europe, after European Nations and the United States lifted crippling sanctions in retaliation for the 1988 bombing of Pan Am Flight 103.

• - The 18th of December 2010 was the genesis of the Arab Spring, with the peoples of the Middle East and North Africa demanding a better life, calling for democracy and rejecting the corrupt neo-sultanic governments controlling their lives.

• - When Muammar Gaddafi and his sons ordered the Libyan army to shoot unarmed civilian protestors, on the 26th of February 2011 the United Nations Security Council adopted resolution 1970, imposing sanctions upon top Libyan officials.

• - Gaddafi’s assassins became increasingly active inside and outside Libya. Several Libyan dissidents and National Oil Corporation executives disappeared, or died under suspicious circumstances.

• - Then on the 17th of March 2011, the U.N. Security Council adopted resolution 1973, strengthening sanctions in response to the deteriorating situation, heavy civilian casualties, and the failure of the Libyan Government to comply with resolution 1970.

• - As peaceful protests turned to armed insurgency, the Gaddafi family and close aides shifted money to protect the family’s billions. Enormous sums of money were transferred to accounts around the globe, gifted to trusted associates, shipped in trucks to Sub-Saharan nations, or buried in the desert.

• - Despite many governments and banks complying with U.N. sanctions, hundreds of billions of dollars escaped the freeze on Gaddafi’s money.

• - Globally, governments identified and froze $160 billion of Gaddafi’s money, yet this amount was estimated to be just a fragment of the fortune held in cash, gold, company stock, property, government bonds, future contracts, corporate debt, and other financial instruments.

• - After the death of Colonel Gaddafi, the Libyan National Oil Company reported the oil drilled out of the Libyan Desert was worth $54 billion per year, massively exceeding that reported by the National Oil Company during Gaddafi’s reign.

• - In a world without Gaddafi, the U.N. Security Council adopted resolutions 2009 and 2011, lifting crippling financial sanctions over Libya. Banks and governments released a modest amount of Gaddafi’s frozen money, so the National Transitional Council could run the country.

• - As the dust settled after the rebellion ended and the rebuilding begun, the reality was that the billions of dollars needed to reconstruct Libya had simply vanished, and the new Libyan Government asked, ‘where has the money gone?’ An uncomfortable question that will resonate across the Arab World, when the Arab Spring ends.

• - After the Arab Spring, a new word will enter the common lexicon – The Arab Heist.

• - Without the money to build essential infrastructure and encourage the young men who before carried a gun to pick up a hammer, the dream of a better life will only be that, a dream.

• - There was a race by the Transitional Government to harness the young rebel fighters’ hopes, before subversive elements harnessed their discontent.

• - Yet the post Gaddafi government was economically hamstrung by what could be the largest theft in history, and the nation slipped into a second civil war, as the democratically elected Council of Deputies and the Islamist National Salvation Government rivalled for control over Libya’s oil wealth.

• - Within the turmoil, ISIS and other militant groups gained a foothold in the failed nation and all sides reaped terror on the people who protested against Gaddafi for a better life.

• - In 2016, over one third of the Libyan population are refugees, sheltered mostly in Tunisia, Egypt, and Europe.

• - Little of Gaddafi’s fortune returned to the Libyan people. In contrast, many of Gaddafi’s bankers and bureaucrats became inordinately wealthier, after the collapse of his regime.

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Chapter 1 - Penney in the City

The City of London Financial District is a ten-block radius centred on Paternoster Square, affectionately called ‘the City’. It is a state within a state, with its own culture, police force, economy and rules, with the City hosting all the noteworthy financial institutions and a magnet for the boutique fund managers. It is also home to the highest concentration of millionaires under the age of forty. Rivalling Wall Street’s financial clout, the City is the world’s largest foreign exchange market, with several trillion pounds managed within just a few City of London blocks. The centre of London is the place where the tenacious and desirous can put-aside five years of their life for the dream of retiring young with millions of pounds.

These young bankers, all with the singular goal to get rich and get out, reek of aggression. Always dressed sharply with thousand pound shoes and Patek Philippe watches, their favourite conversations are about their increasing possessions. They hunt in packs, be it on the street, in the office, the trading-room, or a nightclub, with all the qualities of wolves, except loyalty. In the City, these young wolves stalked money, offering their clients grander deals to lure them into ‘can’t go wrong’ investments. Trading stocks, bonds, currencies, debt, futures, commodities, - even art, wine, and carbon dioxide - there is always someone willing to buy and sell anything to capture higher profits. Yet in the City, the main assets bought and sold are people.

Fine dining at Launceston Place or L'Atelier de Joël Robuchon, followed by drinks and strip clubs, often paying the girls a little extra to satisfy the client with a more personalised service, brokers in the City stopped at nothing to woo, poach, steal and court clients, with most of the clients being the fresh-faced naive bankers. On the table lay anything the client desired, anything to close a deal. If the client wanted a family evening at Cirque du Soleil, they received front row seats. If the client held a fancy for tennis, they received box seat Wimbledon tickets. If the client had political interests, they sat on the same table as the Chancellor of the Exchequer. If the client wanted a bit of nocturnal spice, a lady-of-the-night knocked unsolicited on their hotel door. In the City, the promise to provide above-market profits was not enough. Where bankers wanted a little extra, a broker had to grant their wishes. In return, the trader expected the money manager not to ask hard questions on the provided advice. This meant overlooking the high debt on the balance sheet, ignoring the outrageous cash-burn rate, or swallowing the staggering forecast revenues. The trader who snared the million-dollar deal was often the one who could dish up the best lunch. This was all in addition to the legendary handsome salaries offered in this ten-block district around Paternoster Square.

Humility was rare, boldness cocked prominent, arrogance shouted pronounced and professional life expectancy short. The City may have the highest concentration of millionaires, but it is also a hotspot of illicit drug abuse, sociopathic arrogance, crushing depression, unfounded delusions, and suicide. It is common knowledge that for every twenty young wolves that try their luck in the City, two will make a million pounds and one would jackpot twenty to fifty million pounds within five years. It is an enormous game of roulette, in which these wolves place their lives on the table, and as in roulette, most gamblers lose. Most lose because they were seduced with the lifestyle kickbacks showered upon them, to the detriment of their better judgement. It is only time that separates the acceptance of exploitative advice and the desolate reckoning of so many of these young wolves.

In the City, it is rare to find a banker who survived three economic cycles, akin to a Great War tommy who fought in the 1914 Battle of Mons fighting in the 1918 Battle of Amiens. These veterans are so hardened and experienced that they deserve their titles and respect. They carry a natural presence that the young wolves cannot synthetically copy, because to survive in the City the banker must be ‘the City’. They survive because they take their own advice, viewing the sweet talking brokers with disdain. Unlike the young wolves roaming the City, these veterans possess a bearing that is both worshipped and feared. They are the human embodiment of a financial market.

Jonathan Penney was such a man, and a legend in the City. Imposing, but not domineering, he held his muscular frame developed from his addiction of competing in triathlons during his younger years. Yet his dappled ‘salt and pepper’ hair betrayed his age, closer to fifty than forty.

Penney’s deceptively honest voice, his mystique, his charming demeanour, and his unmistakable affluence, worked together to create a man who was irresistible to most women. Penney’s alluring eyes could attract a lady like a tractor beam. A man of substance, justifiably proud, dignified, socially astute, and remarkably well connected, Penney radiated dominance and strength. With a keen eye for building upon his already sizable wealth, he collectively drew in men envious of his success. Penney was the top wolf in the pack of alpha wolves.

Penney’s success was noticeable, even if the man himself was elusive. Unseen by the common crowd, Penney was one of the most sought after financiers in London by pension funds, corporations, governments and the wealthy. His trading skills were fabled, and his year after year achievements the envy of other bankers.

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In his late twenties and during the heady days of easy money, when Penney became a money manager, he found it easier to raise funds than choose a name for his new firm. It took only a few days to raise his first £150 million, but several weeks to select a name portraying his ambitions. After thorough research, he decided upon the name Juno Moneta Capital. Juno Moneta being the Roman deity, from whom the word money and mint derive. The name carried the gravitas he desired.

In ancient Rome, Juno Moneta was the deity of wealth. It appealed to Penney, associating himself with the goddess of making money. Juno Moneta trumped Plutus the Hellenic God of Wealth. In Penney’s eyes, it was better to be in league with the goddess who made money, than a god blinded by Zeus so he would share money indiscriminately and without prejudice. Plutus was not a good patron deity for this banker. A little more reading galvanised Penney’s choice. The Juno Moneta Temple was now one of hundreds of indistinguishable ruins in the heart of the Eternal City and immortalised by Ovid, Arce quoque in summa Junoni templa Monetæ. Ex voto memorant facta, Camille, tuo. Ante domus Manli fuerant, qui Gallica quondam A Capitolino reppulit arma Jove. The Temple of Juno Moneta was where silver Roman coins were minted. Built on the summit of the Citadel in 390BC where Marcus Capitolinus held out against the invading Gaul Army and saved by the cackling sacred geese, the temple was dedicated to Camillus who returned triumphant over the tribe of Aurunci. The name was just the affiliation Penney wanted with his fund, projecting the image of conquest. When anyone asked why he named the fund Juno Moneta Capital? Penney confidently lectured an abbreviated history lesson on two and a half thousand years of Roman statehood, which said more about the fund’s objectives than any modern mission-statement could contend.

Since the inception of Juno Moneta Capital, an aura grew around Penney, built on a justified myth of financial invincibility, reinforced by success. Penney radiated the power that money carries and he exuded dominance, managing billions of pounds, in stocks, cash, bonds, and synthetic financial instruments. Penney’s gloriole drew investors into Juno Moneta Capital, attracted by the power he commanded.

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Collecting the Financial Times at London’s Bishopsgate news stand, Jonathan Penney strode towards the office, content at the thought that for only a couple of pounds, he held folded between his arm and his Louis Vuitton overcoat, a dossier of Juno Moneta Capital’s day’s trading, and before opening the paper he already knew what they were. Exploiting time pressured financial journalists, Penney handed them ready-made news stories on a platter customised for consumption.

Due to the massive staff layoffs in the increasingly unprofitable newspaper game, the few journalists left in the newsrooms were overstretched just covering the day’s events, less alone pandering to their editors’ increasing demands. The death-knell for investigational journalism rang when the media magnates gave the readers what they wanted, feeding their biases and entertainment. So instead of engaging in the inquiring journalism of yesteryear, today’s financial journalists rely on what companies publicly announce to the stock exchange or opinions by financiers for their news content. Once, journalists injected their energies into investigating stories, gathering expert opinions, interpreting messages, and balancing facts. Yet the pressures of today’s newsroom meant that journalists now relied upon information spoon-feeding, which Penney eagerly exploited. In an effort to give the impression of independence and authority, journalists bickered to be the first to grab a pertinent comment from someone of prominence. Generally, an analyst from a mega bank was passable as a news source. However, the real prize was the quote of a money manager and the more money managed the greater perceived authority that sat behind their words.

In the morning, every morning before he got to the office, Penney’s cellular phone rang alive with journalists racing each other for quotations to repackage as news. Will HealthLinx’s aggressive bid for Northern Nursing Homes be matched by competitors? … Is Wilkins & Hammer stock’s 5.3% fall due to credit rating agency Moody’s debt rating downgrade? … How will investors react to Sino Lambert Capital buying a slice of Thousand River Resources?

Always willing to assist the story-hungry journalists, Penney cheerfully commented on anything, but only on anything benefiting his wealth. He knew too well that the papers churned out his words as news, and people traded stocks on his published opinions, as if what the newspaper reported must be incontestably accurate.

Northern Nursing Homes is the best run elderly nursing home group in Britain’s North East Region, it is highly likely multiple bidders will be fighting for their facilities. On Monday, Northern Nursing Home’s stock price shot-up 34% on rumours of a higher bid. By Tuesday, Penney took the opportunity to sell in the strength of speculative trading, turning a tidy profit after divesting his fund’s holding in this otherwise lacklustre investment.

Moody’s downgrade reflects the higher risk strategy of taking on more debt, but the increased capital will allow Wilkins and Hammer to report higher returns next year. On Wednesday, investors would buy Wilkins and Hammer stock. On Tuesday, Penney would have already purchased millions of call options.

Sino Lambert Capital clearly made a prudent investment into Thousand River Resources, although it’s only a small fund, so one must wonder why the big-boys have not invested. On Friday, investors would sell Thousand River Resources stock. On Thursday Penney would already have short-sold the stock.

Call options and short selling were two of Penney’s favourite synthetic financial instruments. Created to exploit stock price movements and people who had no idea what they were doing, these two invented financial structures allowed Juno Moneta Capital to grow into one of London’s most revered boutique funds.

The call option allows the buyer the right to buy stock at a predetermined price, and when the price of the stock goes up the buyer reaps the reward, after buying the now under-priced stock from the unfortunate party on the other side of the contract. Likewise, short-selling is when a seller sells stock they do not own, then buys the same stock several days later at a lower price. When the price of the security drops, the seller reaps the profit. Moreover, when the banker has the power to manipulate the stock price to go up or down, the call option and short selling become a risk free way of making money. Penney used both these financial tools with ruthless efficiency.

The ‘man in the street’ would argue the way Penney manipulated the media was illegal. There was a litany of reporters and bankers sitting out a few years in gaol after manipulating stock prices. However, Penney, and many other money managers, revelled in the protection of the combination of two fortuitous loopholes in the law. The first being that it was perfectly legal to cite an opinion on public information, even if that opinion was crafted to mislead and prevaricate. The second being, it was ultimately the journalist’s responsibility to shape the tone and persuasion in the printed article. Thus, Penney’s parasitic trading of stock based on his self-serving and biased comments to naive or indolent journalists, reporting his words as accurate news, was not a felon. It was morally reprehensible, but not illegal. The laws may be the same for everyone across England, but the rules were different for the bankers in the City.

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Morning Suzie, Penney greeted his talented trader, as he swaggered into the office after finishing his chore of misleading journalists.

Suzie pleasantly acknowledged the Managing Director with a fleeting smile, concentrating on tidying-up a few last trades on the Tokyo Stock Exchange.

Turning through the Financial Times laid upon his desk, Penney scoured for his polished snippets of wisdom, planted to determine the Moneta Fund’s trades for the day. Today was a good day. Headlined prominently in the front page of the opinion section, Penney found what he sought. A particularly impressionable journalist wrote a glowing exposé on the commercial office sector, heralding the resurgence in real estate. The article quoted Penney verbatim for over half the story, citing the bell had rung at the bottom of the sector’s trough and in the current gloomy environment, the cashed up real estate trusts represented good value.

Suzie, sell fifteen million pounds of Hamilton Brown Commercial & Office Retail, I suspect today the stock will be traded favourably. And while you’re at it, do you think we need to hold those Central Ridge Oil options? he trumpeted to the brunette.

Yes Sir, there is a buy-order at £5.50 on Hamilton Brown. But I think we can get more, Suzie dutifully chirped without lifting an eye from the screen.

‘What would I do without her?’ Penney affectionately mused. Penney leaned over Suzie, but not to the point of being imposing, how much more do you think we can squeeze out of them?

Suzie pointed at the screen to the volume of pending sell-orders, see Sir, there are several nervous traders that are acting indecisively. I can tell this by the lump in the numbers. There’ll be a lot of activity at £5.55 that’ll dry up quickly, but there’s a bulge in the numbers above £5.57.

Penney studied the numbers, but failed to see any pattern. Yet her uncanny ability to read numbers was why he admired Suzie, you mean around the £5.60 price? he guessed.

Suzie nodded, that’s where the pressure starts, but we can see, she added, pointing higher around the increasing sell-orders. There’s more activity in the higher price. That’s why I am confident we can get more than £5.50.

Penney smiled at Suzie’s confidence, but he was not going to confess that he could not see the patterns in the numbers that stood out like a beacon to Juno Moneta’s Trader.

Suzie Davis, young and energetic, instinctively possessed the skills of a trader thirty years her senior, and most importantly, she was a natural in playing the game. A couple of years ago, Suzie’s application for the job exposed a lacklustre academic record. She was far from top of the class. Her résumé read poorly relative to the hundreds of applicants mailed to Juno Moneta Capital the day after Penney’s advertisement for a new trader. The last trader lasted five days after failing to comprehend how the U.S. money supply dictated the value of the U.K. gilt. From the pile of curriculum vitae’s cluttering Penney’s office, something about Suzie’s captured his eye. Suzie’s application differed from the others. She had spent her gap year travelling from Beijing to Belgrade, via Mongolia and the former Soviet Union countries on a mountain bike. During the initial phone interview, Suzie remembered Penney being more interested in her cycling adventures than her academic prowess. Discovering she rode solo for the vast majority of the journey, Penney appeared impressed by her self-reliance and fortitude. This feat of endurance gave her the interview, because it showed she was more than her peers, who thoughtlessly wasted their youth in a Belgrade nightclub, Sydney pub or on an Iberian beach. Calculatingly fearless, Suzie also had the determination and tenacity to push herself, the basic quality needed for a gun trader. Yet it was her first hand insights into how the growing tensions between Tbilisi and Moscow would impact natural gas prices, stemming from heightened Georgian nationalism and an increasingly assertive Russia, that gave her the job. When Suzie discussed the pending annexation of south Ossetia in Georgia, and how she would buy natural gas future contracts in preparation to a coming war, if she had the money, Penney immediately saw the kernels of an excellent trader. Suzie was not just worldly, but she could think like the market.

Eyes hawking between two trading monitors, she watched the red and green arrows dance, as millions of pounds, yuan, dollars, euros, and yen shifted hands with each flicker on the Bloomberg screen. Suzie’s intensity was mesmerising, as she translated the meaning of the arrows and numbers on her monitor. Many can read a trading screen, but Suzie was one of the few who understood the psychology behind the numbers, pre-empting the next moves of the buyers and sellers scattered across the globe, but all trading in the same stock at the same time.

Her mind ticked, £5.66, £5.67, £5.68, £5.67, £5.66 … no … come on. Suzie cursed as the price dipped due to a robotic high-frequency trading computer pre-empting the market, shaving pennies off the price. She could understand the human psychology of a trade, but predicting the behaviour of a computer programmed to trade securities was next to impossible. She threw a large buy order into the market at £5.75 and immediately cancelled it to try to trick the robotic trader, and it worked, … £5.68, £5.69, £5.70. Yes.

At £5.70, Suzie redeemed the option with the tap of her index finger on the keyboard, and Juno Moneta Capital became £8.3 million richer, with Suzie the instant recipient of a £46,232 bonus.

Brilliant job, Penney congratulated his trader, that will be a nice little bounty, and well done … you deserved it.

Suzie’s dimples puckered with a humble smile, thank you Sir, but we had a bit of trouble with those robo-traders again.

There’re over everything, Penney frowned, when I started … nobody heard of high frequency trading …now it’s some sixty percent of all trades. It’s so annoying.

Absolutely, Suzie concurred, I get a giggle when I hear CNN say, ‘investors’ confidence in retail stocks climbed’, or ‘unrest in Europe caused investors’ to lighten exposure to utility companies’, they should have said something very different. What CNN should say is, ‘today several mega-computers programmed to detect changes in the price of securities identified a buy signal in retail stocks and automatically bought it in penny increments’. Or ‘software not available to most people detected a sell signal in European stocks and automatically sold utilities using a predefined formula’.

Yet, televising the reality of stock trading would take the mystique out of the market, and entertaining financial news needs mystery, Penney humoured. Although, it worries me that the mega banks have rooms full of super computers targeting us. Matched against them, the human trader could only be compared to the bravest of Zulu warriors standing up to battle an Abrams Tank, with no prizes in guessing who would win. He chuckled, although you beat them with your little tactic … I like that … it was smart … and you didn’t lose your nerve.

Suzie blushed, thank you Sir.

Penney admired Suzie. Penney found the best people had two innate qualities. They were greedy and they could think like a market. In the market, fear countered greed, and Penney had witnessed more than once the paralysing hand of fear resting on the shoulders of a trader. Funds management is a scorpion existence, with fortunes made on the misfortunes of others. To think like a market, the trader must be an extraordinary individual who can sever sympathy, or have the fortune to be born without empathy. In the amoral realm of finance, empathy is a weakness, which in turn creates indecision and plants fear. Fear and greed dominate the City, with most bankers only a thread away from crippling dread, masking their charade of courageous invincibility. Penney took great lengths to cull this emotion from his small team at Juno Moneta Capital.

Penney smiled approvingly upon Suzie as she finalised the trade, I wish I could find more like you.

Suzie cordially accepted the compliment, thank you again Sir. We try our best.

Your best, Penney warmly praised, modesty and overachieving rarely go hand in hand … but you are an exception young lady. O’ Suzie, you’re the best because you know how the market thinks, but you still keep your humility. Very rare indeed. It’s something that cannot be taught, and so many fail to learn.

Suzie’s lips puckered with approval.

After a short pause, Penney continued, have you seen Singh recently … I would like to see how his new research analyst went with the little test that I got Singh to put him through.

The new guy didn’t come in today, Suzie replied with a cheeky smirk. Singh said that ‘yesterday he stormed out of the office in the afternoon and he hasn’t heard from him since’. You should ask him. He’s just stepped out to get tea and coffees.

Singh, Penney called, as he caught the Head of the Research Department heading towards the office loaded with an arm full of boiling cups, "that new analyst you had. Did he pass the test?

Obviously not, Singh replied. He couldn’t do the calculations you gave him. But then again … neither could I, he concluded with a restrained chuckle. The last I saw of him was when he gave the building the one fingered salute as he stormed out the door. I guess he couldn’t cut it.

It appears so, Penney replied, Juno Moneta is not for everyone.

Singh shrugged his shoulders in agreement.

Helping himself to one of the hot beverages in Singh’s hand, Penney confessed, it’s those new university graduates parading their first class Double Major Degrees and Doctorates, who particularly agitate me. Posting their manicured résumés, meticulously detailing how well they could complete a structured exam, but little else.

Singh put the burning cups on the table, and tried to cool his fingers.

They can’t keep a steady head in a crisis, Penney complained. Assessing their capacity to return from catastrophic failure is the only way to select the timid from the bold.

And most fail the test, Singh added.

They sure do, Penney agreed.

In Penney’s eyes, ruinous failure once, and only once, is not just encouraged, it is mandatory.

Failure creates humility and the best are humble, but the best do not fail, Penney lectured, and most new recruits have no idea what I mean.

Until they resign a month later, Suzie continued.

Or shown the door, Singh sniggered.

Suzie passed her test a couple of years ago by knowing when to abandon an impossible position. Penney organised Suzie to be on the wrong side of a small oil futures contract, but instead of hiding her losses and trying to recoup it by making untenable trades, Suzie instead sheepishly slinked into Penney’s office and confessed her failure. Suzie stood silently and expected his demand for her resignation, but instead Penney congratulated her and heartedly welcomed her into the firm. Suzie had passed Penney’s test by failing. Most did not pass.

Sipping his tea, Penney reiterated his motives to Suzie and Singh for testing new staff, merchant banking is a bellicose game. I need to create a situation where success is unobtainable, just to see how they managed crisis. Engineered crisis is a perfect, real life exam that everyone needs to pass … it’s the only way to select the best.

Singh and Suzie nodded, viewing the ‘test’ as a rite of passage.

Penney needed good people who had humility in the face of the market, and who had been humiliated by the market. Yet with the few selected by Penney’s ‘crisis’, he found people who could keep a steady head, when others were jumping out of windows. Penney groomed people who would thrive in the City.

The Managing Director of Juno Moneta Capital concluded the conversation and returned to his office, clutching the hot paper cup. Uncapping the plastic lid of the café purchased tea, he poured the contents into a bone china cup resting on a matching saucer and exclaimed, much more civilised. However, before Penney could commence the rest of his day’s duties, Suzie appeared with a handful of mail.

Anything interesting? Penney enquired.

Just the same old same old, Suzie replied, but I’ll assume that we now have an opening for new analyst.

Indeed, Penney complained, as Suzie handed him a small pile of unsolicited curriculum vitae and other letters.

Penney regarded reading through all the beggaries for employment as a tiresome necessity, for within the masses of recyclable paper he may find another ‘Suzie’.

Always asking and never offering, Penney sighed after perusing a dozen appeals for employment and filing them in the bin, amongst them three doctoral and five master degree hopefuls.

After opening several other superfluous letters, he came to an envelope displaying the Oxford University logo. "Dominus illuminatio mea, Penney thought aloud, the Lord is my light. Well let’s see what light they have to offer." Inside an invitation to the Vice Chancellery Symposium greeted him.

Suzie, Penney hollered.

Yes, Suzie obediently replied.

Penney handed her the invitation from Oxford University, can you please check the guest list to this function and tell me if anyone useful will be there.

─ £ ─

Chapter 2 – Sharp’s Beautiful Mind

It was during the particularly tedious, but politically useful Vice Chancellery Symposium, Penney met Tony Sharp. A serendipitous encounter to his future quantitative trader was not part of Penney’s motives for attending the symposium. His agenda was to solicit his views on the proposed capital gains tax changes to the Minister of Finance’s aide.

Penney regarded academics with disdain, seeing them as useful as a six hundred page textbook in a dynamic trading room. Their ideas may be correct on paper, but the deal evaporated before they opened the front cover. Yet Tony Sharp, a Rhode Scholar, with a cabinet full of awards and academic trophies, including the Dean’s Award for Mathematics, and a recently graduated doctoral student specialising in high frequency trading was singularly different. When Penney first met Tony Sharp, his preconceptions initially dictated his, soon to be incorrect, opinion. There is a time when every man’s prejudices are challenged, and this young man shattered Penney’s world.

To the horror and dismay of his professors, castled in the sanctuary of Oxford University’s sandstone and oak, Sharp considered declining the offer of the tenure as an Oxford Reader, abandoning a mapped career towards a Professorial Chair, to try his luck in the City. The department first tried vainly to persuade their brightest to reconsider his decision. They later distanced themselves from his wayward ambitions. The idea of the Rhode Scholar not following a tradition of academic excellence for the benefit of pure knowledge was inconceivable to the tenured professors. The exceptions were a few failed bankers and entrepreneurs, who years earlier retreated to the safety of academia, endorsing Sharp with a coded ‘wink and a nod’. They were privately envious of the future awaiting him, and lamented the past they squandered decades earlier.

The Secretary to the Chancellor of the Exchequer gravitated towards Penney, cognisant that his boss wanted to know Penney’s thoughts on the economy. Regularly reported in the media, the secretary was innately aware that Penney’s opinions carried weight. So being aligned with, or at least understanding, Penney’s views were politically prudent.

Unobtrusively sliding into a conversation between the Dean of Economics and Penney, the secretary listened intensely on the gentlemen’s views on the lack of economic growth and inflation in the U.K.

The slow economic growth, the aide eventually added, should blow over when the rest of Europe works itself out.

Penney and the dean smiled, amused at the simplicity of the secretary’s account of the economy.

Bring the two together and it is very likely to cause stagflation, the worst that could occur, Penney gently advised, with growing unemployment because the private sector is not absorbing retrenched public servants … as part of Parliament’s necessary austerity measures. Anyway, what’s a few hundred thousand more unemployed for the sake of keeping Treasury’s spending in check?

The aide was embarrassed by the rebuttal, increased unemployment or more government debt … there is no nice way out of our dilemma.

It is not the jobless that worries me, the dean added, for me, the national deficit remains worryingly high. If government borrowing continues as it is and if Europe sours further, than the U.K. might find itself deeper in the fiscal woods … then we will have a lot more unemployed to worry about.

Which is why we need to keep tax down, Penney quickly linked the conversation with the reason for attending the symposium, any increase in capital gains tax … particularly on company stock … will only discourage investors … which wouldn’t be a good move for a country whose chief source of income comes from the City.

The minister’s aide had no opinions on the subject, but concentrated on Penney’s planted advice and nodded in recognition of receiving it. Penney’s comments would be in the ear of the minister within the day, as one of London’s influential financiers, and those like him, could become a sharp thorn in the Chancellor of the Exchequer’s side if the government tried to extract more money out of the bankers. The secretary was going to recommend to the Exchequer that additional revenue is likely to have to come from other parts of the economy.

Throughout the conversation, the Dean of Economics continually scanned the room, while politely adding his views, mostly in support of Penney. After a short time, but long enough for Penney to dispense his biased opinions and the secretary to get a full understanding of the political implications of opposing the City’s bankers, the dean interrupted the discussion when his eyes caught the person he sought.

It would be smart to listen to Penney on these matters, the dean recommended, now you must excuse me because there is a young chap that is just dying to be introduced to Mr Penney.

The dean guided Penney across the room and past the boorish Chairman of the R&D Committee, who would have tried cornering Penney with another incensing appeal for philanthropy. Jonathan, I would like to introduce Dr Tony Sharp. Like yourself, he has travelled the River Styx, chuckling at his own joke which neither Tony nor Penney understood.

First impressions were unflattering. Fresh faced and lanky, Sharp’s fashion sense contradicted his namesake. He embodied the quintessential stereotypic academic, hidden behind thick silver rim spectacles, socially reserved and proper, right down to the woollen tweed jacket with leather elbow patches.

Dr Sharp and Penney became acquainted with a broad smile and strong handshake, Dr Sharp.

Just Tony please, the academic interjected.

‘Refreshing. He did not have the God complex of other academics’, thought Penney.

The two acquainted each other with small talk about the varying quality of the wines served at the symposium, speculating which came from the Vice Chancellor’s private collection, and which he purchased for the occasion. Both concluded it would be impossible to buy Les Domaines Paul Mas Chardonnay 1997 or Château Le Rothschild 1955, but the Montgras Merlot 2007 and Arthur Metz Gewurztraminer 2009 were not from the Vice Chancellor’s cellar. Tony concluded it must be the only logical explanation, as the waiter always served the Vice Chancellor and his clique of aging professors first from one tray before serving the other guests, while the other tray never reached the Vice Chancellor and went to the back of the auditorium first.

So Tony, what is your research about? Penney eventually enquired after warming to the young man, but slightly fearful that asking a scholar about their work commonly leads to hours of intellectual babble.

Tony smiled, my work should be of interest you. It’s about high frequency trading … but not like the high-frequency trading systems used by the big banks, like Goldman Sachs or Barclays. But a fuller explanation would be too long winded to go into detail here.

‘Thank God’ thought Penney, relieved Tony spared him from an impromptu laureate lecture.

Observing Penney’s inquisitive smile, Tony continued, for my PhD, I created a mathematical model that predicts patterns from rapid historic actions. Actions that occur in the blink of the eye. I then built these models into a computer programme that can read the trading signals of the conventional high-frequency trading programmes. The mathematical models I developed have multiple applications … such as small ballistic guidance, electricity management, nano-robotics … but I ascertain the cleanest way to use my maths was trading government bonds.

Penney’s genuine interest was piqued, fascinating. Is it like ticker tape high-frequency trading, with high-frequency trading machines capable of extracting information that has not yet crossed the news screens?

Not quite, it is more advanced than that. Those high-frequency trading models pre-empt the price of bonds or stocks by using the quote price and volume. My model actually pre-empts the high-frequency trades. When we know the history of a series of events, we can predict the next sequence of events based on the last. This is self-evident. Everyone uses this basic principle in everyday decisions. But I asked the question, ‘do a series of events have a natural state’ and ‘do forecast numbers have entropy’? Well, I found the answer is yes!

Penney’s curiosity kindled, and he did not realise he was nodding for Tony to tell him more.

Let me explain, Dr Sharp unwittingly pushed back his glasses, more showing he lost some of his concealed nervousness than to reposition his spectacles, if I build a sand castle on a beach. The sand in the castle has a low-entropy or ordered state. There are only a few combinations the sand grains can arrange themselves to make a sand castle, and the wind quickly blows the sand around the beach to a high-entropy or disordered state. This is obvious. Once the wind destroys the sand castle, there are many billions of possible permutations the grains of sand can be arranged. But in the manmade world, we are constantly making new sand castles, so the entropy of some … but not all … of the sand in the previous sand castle is constantly being reset, Sharp explained, trying to use the most simple terms, but could see he was failing.

Penney began to think he should have not dispelled his initial concern of Dr Sharp ensnaring him with the intellectual gibberish of an overly eager academic, but I don’t understand what sand castles have to do with finance. Just give me the overview … no need for the details.

Tony, seeing he was in danger of losing his target, changed tack, think of each grain of sand as a trade. In finance, the new stock or bond price is like rebuilding the castle. With the advent of micro-trading or high frequency trading, the multitude of tiny trades around the last and the current stock price are the grains of sand blowing in the wind. My mathematical models will predict ‘where’, ‘how’ and ‘how fast’ the grains of sand in the sand castle would form a random pile of sand. Thus, I can predict the movement of prices, based on trading activity. But not just the traded transactions, but also the bid and offer prices … and importantly … the bid and offer prices mathematically generated by high-frequency computer trading.

Penney consciously held his glass tighter, because he could feel it slipping from his fingers. Dr Sharp’s doctoral work was immediately crystal-clear. It was a new mechanism for making money.

Tony breathed a sigh of relief when he saw his pitch hit its mark.

Unbeknown to Penney, Tony had spent months planning to meet Penney at the Vice Chancellor’s Symposium. He even specifically asked the reluctant Vice Chancellor to ensure the Managing Director of Juno Moneta Capital received an invitation. Dr Sharp knew that once he had engineered his idea into a mathematical model, it had enormous potential in the right hands. Although the problem Dr Sharp faced was getting face-time with the hedge fund operators who would be interested in taking his project on, less alone take the time to talk to him. In the final months of his PhD, Tony had created a list of fund managers he was going to sell his idea to, and for each he researched how to corner them into a meeting. He previously sent an unsolicited résumé to Juno Moneta Capital, where upon hearing nothing he was determined to be more forthright. It was from one of the department’s newer lecturers he heard that, Jonathan Penney … the Managing Director of Juno Moneta Capital … is notably always around when a politician or political advisor is present. One could conclude he has a weakness for manipulating power. This was Tony’s opportunity. The symposium on the outcome of Professor Gibson’s study on the merits of the Venture Capital Trust programme would attract a number of House of Commons members and their bureaucrat entourage.

So, Mr Penney … Sharp eventually plucked the courage to ask what he really wanted.

No, just Jonathan, Penney waved a dismissive hand, mirroring Tony’s earlier intentional informality, although if Tony joined his fund it would be back to Mr Penney.

So Jonathan, could I bother you to ask if I could undertake a sabbatical with Juno Moneta Capital, to conduct beta testing of my formulae. Of course I’ll not be using real money, as I would run my models over a dummy portfolio.

Penney gasped. This young man had not only demonstrated the genius and tenacity to develop a mathematical model that could revolutionise high frequency trading, and obviously sought him out at the symposium. Then in his desperation to enter the industry and prove his labours, he offered to work gratis. Penney clearly saw that Tony wanted to join Juno Moneta Capital, but to ask to start working for no remuneration was almost incomprehensible, and yet immensely admirable. Tony was offering and not asking. As rare as it was, Dr Sharp, the gangly alumna, exhibited so much confidence in his algorithm, he knew he could quickly demonstrate to Penney the enormous value of his computations. Penney respected such humble self-confidence. But more so, he understood that the owner of the software would have a clear five year lead over the big banks whose high-frequency trading activities were harassing investors globally, skimming massive profits from the market on almost every transaction.

‘This was’, Penney thought, ‘the most exciting trading idea in ages’.

The rise of high frequency trading retarded Juno Moneta’s attempts to profit from arbitraging securities, with computers located thousands of miles away, or in the next street, pushing the price up or down. These computer malefactors infuriated Penney, as he no longer could get the best price for his trades. Sharp had, in his beautiful learned mind, developed the tomahawk missile aimed directly at the robo-traders that Penney so hated. With Dr Sharp’s intellect, he was going to extract his revenge.

I’m not sure simply testing your ideas would give them the justice they deserve, Penney asserted with the tone of a caring uncle. In my judgement, your model needs more robust, more real life assessment. What would you say if next Monday, you install this system at Juno Moneta Capital? Then … when you’re ready … let’s start testing the model with … say … fifty million.

Tony Sharp sprang backwards, unsure if he heard correctly. Did you say fifty … fifty million dollars?

Sorry, Penney corrected, pounds.

Tony stared down intently into Penney’s chest, losing all ability to look anyone in the eye. The newly recruited algorithmic trader commenced prattling about how ‘this has’ and ‘that has not’ been thoroughly tested, and ‘he needs his Professor to recheck and stress test his model’, until Penney rescued him from a clearly uncomfortable situation.

Here’s my card, Penney offered, we can work out the details later, but all I need to know is that you can do it.

Yes, yes, of course I can, Tony stuttered, ecstatically smiling.

Good, replied Penney, call me when you’re ready.

He left Sharp, the former academic, turned trader, clearly in need of some personal space.

Returning to his Aston Martin One-77, Penney phoned Karen.

We have to open the old offices for our newest star recruit.

Karen was intrigued, let me guess, her wardrobe is all size six? Or is it because of her mind?

I’m not sure about his dress size, Penney fired back, but he has the most fascinating mind. Karen, I want you to get all the research publications authored by Tony Sharp from Oxford, and learn everything you can about his work. You have a new partner.

─ £ ─

Within a month after the symposium, Tony sat in the office, running his rudimentary counter high-frequency trading programmes, making for himself 5% for every trading win matched against a 5% deduction for every trading loss. Dr Sharp’s years of late nights, frustrations, dead-ends and incremental victories in the Oxford Mathematics Lab proved fruitful. The system was profitable on the first day and impressed everyone in the team, including a reluctant admission from Karen. Tony Sharp quickly upgraded from a woollen tweed to a cashmere jacket, albeit still with leather elbow patches, and moved from his humble Willesden Green flat into a stylish Warwick Avenue townhouse. However, despite admiring the MG sports cars in the showroom, he could not part with his beloved and banally practical decade old Corolla, which was out of place when parked in front of his new home.

Seeing the nascent model in action more than demonstrating the profitability of pre-empting millions of high-frequency trades each day, Penney entrusted Sharp and his beautiful machine with another two hundred million pounds. Sharp’s mind was quicker than the hardware first used to calculate his formulas, but that changed with