The Icarus Prediction: Betting it all has its price (3 page)

The crew was going to a new tanker coming out of a South Korean yard in a month or so, and they were going to enjoy a few weeks of paid leave. And wow! That new ship was a colossus. It was triple the capacity of their old vessel, and another eleven vessels were about to be delivered as part a group of ships dubbed the
Daedalus
fleet.
Amazing what $186 in tequila could buy you.

Jarrod heard the same story from three other Tribeca crews, meaning the new ships coming online, after some sea trials, would increase Tribeca’s transport capacity dramatically in a compressed timeframe. And all the Tribeca tankers were under exclusive contract to the Arabian-American Oil Company (ARAMCO), which was to say that all the oil shipped via Tribeca vessels went directly into Saudi coffers, as opposed to an Exxon or Chevron tanker, where the spoils were split up via various concession agreements.

He boarded the Gulfstream to go to Dubai. After the jet touched down, Jarrod looked up his old bud, who was now deputy CIA station chief after transferring from Riyadh. In a palatial hotel bar that served only fruit juice, Jarrod learned that, yes, there had indeed been a food riot in al-Kharfah. Between that and the Arab Spring uprisings, the royal family was scared shitless. They had to placate the masses and had announced they were going to launch a staggering program of $250 billion to build low-cost housing and get food prices down. That meant they needed more revenue, and that meant shipping more oil. OPEC be damned, which was usually the case anyway.

Over the next sixty days, Tribeca’s tanker capacity was going offline as crews switched to the new vessels. This would put a major dent in ARAMCO’s shipping capacity, temporarily making supply look constrained and driving prices up. However, when the new tankers came online, the capacity would spike, flooding the market with and abundance of oil and driving prices way down.

With these seemingly disparate pieces of information—all blurred by the angst over the Iranian situation—Jarrod realized he was the only one to tie them together and see a “whipsaw” in the making.

In trading speak, a “whipsaw” referred to a wide swing in price that first goes one way, then the other. And as long as you have the right position on the trade, you can make money if the price goes up or down. But of course, if you bet on the wrong direction, you’re cremated.

So Jarrod clambered back on the Gulfstream and rocketed back to New York. In his capacity as head of energy trading for the firm, he had authority over $50 million of the firm’s own capital to employ, which was in a separate bucket from the $500 million and change he traded on behalf of Blackenford’s clients. He could have gone upstairs to the Big Cheese to ask for more, but he was taking enough risk as it was. He drove his staff mercilessly over the next week, culling through every shred of data. Then he closed out the firm’s positions and deployed the capital in a new trade betting on oil to go up. The bottom line was that if the price did not swing well north of current pricing within sixty days, Blackenford Capital would be taking a $20 million bath, and Jarrod would be out on the street.

In other words, just another day at the office for a big-time Wall Street trader.

“OK, what’s the status of the Tribeca tankers?” he asked Delaney.

“This just in. Our spotter at the Strait of Malacca in Indonesia confirms the
Charteris
and
Ming Po
just transited from the Pacific and have entered the Indian Ocean.”

“Good. That puts them seven days out from Hormuz. Latest back channel on Abqaiq?”

The Saudi oil processing facility of Abqaiq near the Persian Gulf Coast was a colossal installation where the bulk of Saudi petroleum is transformed from heavy to light crude. It was stored and then shipped via pipeline to the offshore loading terminal at Ras Tanura in the Gulf.

“Word is the Saudi tank farms are full and waiting for more tanker capacity.”

“I love it when a plan comes together.”

The younger man asked, “Think we should start closing out the positions?”

“Pretty soon. The tankers have to make it to Ras Tanura, take on the juice. Another couple of weeks to market, but I’ll have a chat with our quant.”

In Wall Street parlance, a quant had a PhD in math, physics, or statistics and applied their wizardry to the machinations of financial markets. Jarrod’s team had its own quant, Sergei Dobrinin, who helped Jarrod beat his fiscal targets on a regular basis.

Jarrod moved up and down the trading bench like a coach on the sidelines, coaxing, bantering, and keeping the team focused. He was on top of the firm’s capital, and a $500 million chunk of the $2.3 billion in client money that Blackenford managed. Some of those client accounts were linked to the same energy trades as the firm’s accounts, but each client had customized nuances—stop-loss orders and the like—the team had to look after.

After he’d played cheerleader long enough, he peeled off to one of the windowed offices along the wall where Sergei did most of his deep thinking. He courteously knocked on the open door and received a wave in reply.

Sergei had his back turned to Jarrod and his nose in the computer, as usual. A smoky haze filled the room despite two air purifiers humming away, and most of the floor space was taken up by stacks of technical journals on math, statistics and artificial intelligence.

Finally, the chair spun round, revealing a gray-and-sandy-haired, middle-aged man wearing horn-rimmed glasses. With a rumpled shirt and tie and a cigarette dangling from his lower lip, he looked the part of the absent-minded professor, which is exactly what he was.

Leaning on the doorframe, Jarrod observed laconically, “You know, one day we’re going to get a visit from the fire marshal, and he’s going to shut us down. We’re probably violating a dozen ordinances, firm policy, and who the hell knows what else.”

The professor shrugged and replied in a thick Russian accent, “You want me, you get my ceegarettes as well. In my contract. You lucky my Cubans I don’t roll at work.”

Jarrod sat down and put his feet up on the desk.

“Sergei, how is Icarus doing. Did he validate our calculations?”

“Sorry boss, Icarus was having bad day, I had to kick him a little, he is ok now and I’ll ask for his thoughts, but I need some time.”

Icarus was a state of the art supercomputer Jarrod had acquired for his group about 6 months prior. And this was no ordinary number crunching box of processors; this was an 8 million dollar work of wizardry. Icarus used an artificial intelligence chipset that combined the creativity of human thinking with lighting speed execution. Amazingly, it was capable of taking disparate pieces of data like weather forecasts, and blog posts and churn out creepily accurate financial recommendations analyzing billions of pieces of data
per second
. Icarus even scoured social sources like LinkedIn, Twitter and Facebook to help tailor research and maximize trading recommendations. The system was only about the size of a filing cabinet adorned with a few dozen rows of green LED lights flashing rapidly in random patterns. A stealthy Silicon Valley startup company supposedly employed a bunch of ex-DARPA engineers, PhDs and even a few hackers to create Icarus.

For the first few months, Jarrod and the team had played around with Icarus as if it was the latest new gadget, but in the last few weeks, they were starting to really believe in its capabilities. It was however still in “beta” mode, so some of the recommendations Icarus would generate were buggy or cryptic. Not to mention you would often need your own team of brainiacs to properly interpret it. Just a few weeks prior, Icarus had suggested Jarrod sell shares of a well known energy company with one of the best CEOs in the industry due to a 81% likelihood of an “adverse social event” triggering “potential organizational changes” which would exert “eventual downward price pressure” on the stock. At the time, Jarrod brushed it off as errant computer babble, but no less than a week later the CEO stepped down and the stock tanked as it was revealed that he was having an inappropriate affair with a much younger intern at the company.

Although it wasn’t clear at the time, Icarus made the discovery based on language and context clues between the CEO and intern based on data mining of recent social media posts and twitter feeds. However, it didn’t seem possible that Icarus called the affair from
just
those pieces of info. From that eye opening moment forward, Jarrod started using Icarus to validate his investment ideas.

Sergei stubbed out his Marlboro and fired up another in one fluid motion. “Da, Icarus seems more stable today, it was not processing model properly yesterday, it seem angry. It keep beeping at me.”

Jarrod clasped his hands behind his head and said with a smirk, “Angry? Icarus is a glorified desktop computer, not Chucky from Child’s Play. Anyway lets sit and focus on our exit strategy, we have got a long day ahead of us. If we screw this up like Martin did with the ridiculous Zambian bond fiasco, we are all going to be raked over the coals.” Sergei nodded and chimed in, “Da, I pretty sure he is going to be fired next week.”

Jarrod continued, “Pretty tough considering he was trending towards being the golden boy of the firm a few short months ago.”

As if on cue, Sergei, leading with his chin, motioned slightly towards the door. Jarrod turned around to see a distraught Martin standing against the doorway with a “deer in headlights” look. Martin, or “Marty” as he was known throughout the office was a 5 foot 4 boyish looking “nerdling” 3 years out of b-school (In his defense, he did graduate in 1 year). On a wet day, he was probably pushing 125 pounds and often asked for his ID to prove his age (or rather prove the fact that was really an adult). He had gotten lucky on some trades earlier in the year until things fell apart in a big way.

Martin traded looks between the pair. “I’m going to get fired?” he squeaked.

Jarrod interjected trying to be as convincing as possible. “No, of course not, I was just joking with Sergei here to make a point.” Unfortunately, Sergei didn’t get the memo and his bluntness got the better of him.

“Marty, you weel not be fired today. But next week, da, you will be gone I pretty sure. Time start packing your tings.”

With that, Martin turned into a heartbroken schoolgirl and literally ran down the hall in tears, tripping along the way over a potted fern.

Jarrod turned back towards Sergei and he pointed towards the now vacant doorway. “Seriously? Now I have to go clean up this mess with HR!”

Sergei was not apologetic. “I help him, he needs to be man. He smells like lilies.”

Jarrod shook his head in annoyance and decided to tackle the bigger fish on his plate first.

“Ok, lets just focus on this trade.”

Jarrod rescanned his terminal. “West Texas Intermediate is at $79.50. Inventory stocks running at a daily net outflow of 1 to 2 percent. The new tankers are seven days out from Hormuz and tank farms at Abqaiq are brim-full. Update the model, get the granular data from Chet, and give me the best close-out point.”

Dobrinin nodded as he scribbled on a pad. “I weel do it, but to be safe, I would not go past three days. The Saudis will start putting out contracts on the excess production two or three days prior to loading. That will start depressing the price. And hopefully the Israelis and Iranians won’t do anything crazy in the meantime.”

“I agree but run the model anyway. The Saudis are not fools. They’re probably doing the same thing we’re doing, only with inside information.”

“Of course. Are you going to flip the whole position?”

“Might as well. Opportunities like this don’t come along like this every day. Within a few days, we’ll could have exceeded our profit targets for the next two years.”

“Joost in time for your coronation as Blackenford’s new general partner and a slice of riches. How convenient.”

Jarrod couldn’t suppress a smile and subtly agreed. “William
did
say he would make the selection based on profit and profit alone.”

In the push for a competitive edge, investment banking firms and hedge funds had come to rely more on quants. And when combined with complex program trading, the algorithms these quants created were like some kind of science fiction Wizard of Oz that had taken over the economy. Trades in the billions were made, purely from machine to machine, with humans out of the loop except to tweak the software and algorithms. Indeed, that was expected to take profits to yet another level. “Make money while you sleep.” That was the mantra of the quants. But the truth was that with global markets, traders never really turned out the lights. In the immortal words of Gordon Gecko, “Money never sleeps.”

Before the financial meltdown and the Great Recession, quants had taken over Wall Street, spinning their magic in a mathematical jargon only they could understand. And as long as it worked, nobody tampered with the genies they had created. But the old adage of “garbage in, garbage out” came home to roost on the quants. Because the algorithms were based on continued increases in home prices, and it had held true for so long, no one—not the army of PhDs or “smart” wealth managers—ever challenged that fundamental assumption until the house of cards fell.

Sergei Dobrinin had a stellar academic record, receiving his PhD in mathematics from Moscow State University with a focus on artificial intelligence back when everyone thought it was a far-off pipe dream. He’d been recruited into the KGB’s cryptology division just before the Berlin Wall came down. After that, career prospects looked grim in Moscow, and Sergei made his way to New York, where he scored a job teaching math at a junior college. His brilliance soon became evident, and a technical paper he authored about multivariate analysis caught the eye of a talent spotter at Morgan Stanley.