Extract from Nest of Vipers

a banking thriller by Linda Davies

What if a speculator was blackmailing a central banker or finance minister into revealing currency support interventions and interest rate changes? It would be like knowing the winner of the Arc de Triomphe in advance, or having the keys to Fort Knox.

This extract from Nest of Vipers was read by Linda Davies at the Financial Panel 1997 of the European Research Center, Amsterdam, - Will the EMU Pay Off? Anticipating the Effects on the Market.

The extract is from chapter 15, p.163-171 in the US hardback edition or 124-130 in the UK hardback edition. (The page numbers are slightly different in the UK paperback edition).



Sarah heard her name shouted from across the trading floor as she returned from lunch, an hour late, her cheeks glowing from the champagne.
'line two," announced Simon Wilson, as she hurried to the desk. "Some Kraut." Sarah glanced at him and hit line two. It was Manfred Arbingen. He came straight to the point.

"Did you know there was a G7 meeting today?" he asked smugly.
Sarah laughed. "No, I didn't. That's peculiar, the next one was supposed to be in two weeks."
"Very peculiar. Unscheduled, unannounced. I only know because I went to the Bundesbank to pick up a friend for lunch. I had my car, we were going for a drive into the country. Anyway, as I was driving in, I almost got mowed down by a cavalcade of limos, six of them, tinted windows, big aerials, you know. I wasn't sure who it was, so I asked the guards, and they whispered that it was the finance ministers and central bankers. G7."
"What do you think they were up to?"
Arbingen laughed. "What do you think?"
"Well, it couldn't have been policy. That would keep until the next scheduled meeting. It must be some sort of intervention." She paused, weighing things up. "But that hardly warrants a special meeting. They could have worked that out on the telephone, unless it was something really big, controversial, and I don't think that's likely. None of the currencies are that out of line."
"They"re not," agreed Arbingen.
"The same goes for interest rates. I can't see them making any dramatic gestures there either."
"I can't make any sense of it, that's for sure. I suppose we'll all have to wait and see. We'll find out something sooner or later."

Sarah thanked Arbingen for his news, cut the line and replaced the receiver slowly on the desk. Sooner or later wasn't good enough in the markets. You had to find out now, before the next man, anticipate the market's conclusions and reactions, position yourself accordingly. Sarah's mind began to race.

She got up and walked over to the coffee machine, hidden in a little alcove on the edge of the trading floor, next to the atrium. It was light and secluded, and you went there for a seemingly casual gossip, or, like now, if you wished to think unobserved. Curiosity is endemic on a trading floor, and traders are adept at perceiving secrets fermenting in a colleague's mind, then relentlessly ferreting them out. Sarah had no intention of revealing to her colleagues what was on her mind, but she could do without the grilling and the scrutiny. It was impossible to think straight when at least two pairs of beady eyes followed your every move.

She stared at the coffee machine, taking extra time to ponder the buttons, before finally punching out 146: coffee white, frothy, medium strength, one sugar. The coffee machine burped and spluttered, a plastic cup dropped into position, and with a noisy squirt steaming liquid rose to the brim.

Sarah sipped carefully, mulling things over, gazing out at the pot plants dotted around the floor of the atrium. Last Thursday Scarpirato decides to buy one-week sterling/dollar futures, selling the dollar, buying sterling: a plausible, but highly speculative position. Four days on, one event, which might make that position pay off, takes place, secretly. And now, no doubt sterling would start to rise. Some coincidence, thought Sarah.

Insider trading was one of the fastest ways of making money known to the City. It could explain the spectacular profits made by Scarpirato. It was also one of the most difficult forms of fraud to detect and prove. Tracking the flow of information was like trying to catch quicksilver.

Sarah reached for a cigarette from the packet in her shirt pocket. She struck a match and inhaled deeply. If Scarpirato were trading on inside information of G7's currency intervention activities, then he must have a very senior mole. G7's currency policy is one of its most closely guarded secrets. Because of the danger of leaks, it is rarely consigned to paper. It is discussed and agreed by the ministers, the central bankers and the prime ministers of the member countries, and put into effect by the central banks. It is executed by the trading departments of the central banks, but Sarah thought it unlikely that any leaks would come from there. The traders would be told at the last minute. They would have far less time to pass on their inside information than would their superiors, the ministers and the bank governors. And the traders would be more exposed. All their calls were taped. Any transgressions would be all too obvious. Sarah felt sure that if there was a leak, it would come from the mist-shrouded upper echelons.

Sarah puffed furiously on her cigarette. If her theory was correct, a top politician or central banker was at the centre of a billion-pound conspiracy. The possibility was almost too large to grasp. To a foreign exchange trader with access to large sums of money, and the cover of regular dealings in the market, having a mole in G7 was like having the key to the central vaults at Fort Knox.

The implications hit Sarah like a fist in the face. If there was such a conspiracy, the participants would not give up high office and big money without a fight.

Abruptly, Sarah dropped her cigarette into her coffee and placed the cup into the waste bin. She turned and walked towards the ladies room. Locking herself into a cubicle, she dropped the cover over the lavatory, and sat down. She leaned forward pensively, her chin cupped in her hands. She sat for ten minutes, till the cold marble floor chilled her feet through the soles of her thin leather shoes and the violent air conditioning raised goosepimples on her arms. Her nerves gnawed at her stomach.

She knew that she had already made her decision, even as her rational mind paraded alternatives before her as if she had a choice.

She stood up and briskly rubbed her arms. It might just be that her imagination had run out of control. It wouldn't be the first time. But she would pursue her suspicions until they were exhausted, or confirmed. She would worry about the repercussions when they came.

As she walked back to her desk, she was surprised to feel, not trepidation, but a sense of reckless exhilaration. It made her think of Alex. He had used those words when trying to describe the feelings that swept over him as he ascended a sheer rock face, with thousands of feet of empty space hanging below him. He said that his courage increased when faced with a particularly hazardous cliff. Sarah laughed at herself Alex, in his gentle way, would have ridiculed the comparison. Each time he inched up a rock face, clinging on by fingers and toes, he risked his life. Sitting at a desk in central London was about as safe as you could get.

Sarah walked back to her desk.
"I think I'll join this little punt."
Arnott sat up out of his slouch. Wilson grinned as if it were a huge joke. Sarah smiled grimly. She could do with the money; she could ill afford the risk, but then, she was sure, that there was very little risk involved. It was what they called on the floor, a no-brainer.

She decided to go into the market and take a spot position. She had capital of two hundred thousand pounds in cash. That enabled her to trade a maximum of three million pounds. The difference would be made up of borrowed money. If her position started to lose money, she could run it until the losses reached two hundred thousand pounds. Then she would be forced to cut the position and the two hundred thousand pounds would be raked out of her account to cover the losses. But Sarah felt confident there would be no losses.- her capital would be safe. She called Johnny McDermott. Normally someone like McDermott, who dealt with the orders of big institutions, wouldn't take personal account (p.a.) trades as well, but he made an exception with Sarah.

McDermott had started his career executing p.a. trades and Sarah had been one of his early clients. When McDermott changed banks and began to execute institutional trades, he dropped most of his p.a. clients, but Sarah remained. The compliance departments in their respective banks didn't exactly love the relationship: it could look a bit incestuous; but they lived with it. They accepted the argument that Sarah and Johnny put forward. They just liked to trade together, it amused them, brightened their day, and, more importantly, both Sarah and Johnny were "big hitters", making huge profits for their employers. They earned a little leeway.

They would sometimes spend hours a day on the telephone, talking, joking, amusing themselves if the markets were quiet, but they could be equally brusque.
"Johnny, where do you have spot Cable?" "1.4560, 70."
"I'll take three sterling at seventy, p.a.."
"That's done. But you"re cutting it a bit tight, aren't you?"
"Don't worry Johnny. I know what I"m doing."
"I hope so."

It was the biggest personal account trade Sarah had ever done. She had traded over a hundred times that amount many times at Finlays, but other people's money, referred to as OPM, or opium, on the floor, always felt different. It was just a commodity, a series of numbers that moved one way or the other. There was excitement, pain when positions didn't work out, but never the direct, searing hit of emotion in the bloodstream. Other people's money just slid off the surface.

Sarah wrote out her trade ticket, stamped it, dropped it in the settlements tray and lit up a cigarette. She felt the delicious double edge of the gambler's thrill. If the trade went wrong, her capital would be wiped out, and with it much of her security. But if it went right, she could make tens of thousands of dollars. And see her hunch confirmed. It wouldn't prove that Scarpirato was insider trading, but it would substantiate her suspicions. She leaned back in her chair, face raised to the ceiling and exhaled loudly. Arnott watched every move, and looked at her strangely.

Minutes after Sarah had completed her trade, the central banks of G7 entered the markets simultaneously and started buying sterling and selling the dollar. The word spread like wildfire around the trading houses across the globe: somebody, somewhere, was buying sterling, in size. First the big banks and currency funds started buying for their own account, then smaller buyers jumped on the bandwagon.

At two fifteen p.m. London time, ten minutes after Sarah had taken her position, sterling began to rise. Sarah watched the green flickering figures, dancing more than usual after her liquid lunch. She screwed up her eyes, and felt the first tremors of excitement. Sterling was rising in little hops, minute by minute. She watched the procession, her mind a well of concentration, ruthlessly shutting out all other thoughts, watching the market, talking to the market, feeling the market rise. For every tick - one hundredth of a cent - sterling rose, her paper profit grew by three hundred dollars. And the desk's by around fifty thousand dollars.

The proprietary traders watched and waited. Dante Scarpirato left his sanctuary, took his trading seat next to Arnott, and peered at the screens. A controlled excitement gripped the muscles of his face as sterling ticked up. By three o"clock, it was up three quarters of a cent against the dollar, and the desk was sitting on a profit of over four million dollars. Enmities forgotten, they huddled together in excitement. They all agreed it was too early to cut the position and take their profits. The trend was accelerating, with sterling rising in bigger jumps each minute.

By twenty past three, the pound was up a full cent against the dollar. No one they spoke to in the market knew why. No new figures were out, but someone somewhere was buying, and in massive amounts. The word was buy sterling; the rumours were rife. Sarah listened only to one: the central banks, led by the Bundesbank, were buying sterling. It was just as she expected. She turned sideways in her seat, and caught Arnott and Scarpirato in profile. They looked triumphant. Clearly she was not the only one who was not surprised.

As her suspicions were borne out by the figures on the screens in front of her, she felt a mixture of fear and excitement.

At three thirty, sterling had risen one and a quarter cents against the dollar. Sarah's profit was $37,500; large by personal trading standards, but dwarfed by the desk's profit. Sarah did a quick calculation in her head: nearly seven million dollars.

Sarah closed her ears to noise around her and sat in a vacuum of concentration. She held on. Scarpirato sat, cigar smoke rising like vapour, as he stared, transfixed at the screens. It was almost as if he were willing the market up. Wilson and Arnott united against him, urging him to cut the position. He quashed them with a raised hand; King Canute holding back a wave of entreaties. Sarah watched, saying nothing.

At four o"clock she decided it was time to sell. She rang McDermott.
"Johnny where d"you have Cable?"
"Ninety-five figure five." (Shorthand for 1.4695, 1.4705)
She sold, nearly forty thousand dollars richer in a couple of hours. Her first taste of dirty money. She examined the sensation: a certain stickiness, unreality. She felt that she was leaving herself behind. Another rubicon had been crossed. She deadened herself. It was, she told herself, crime in the name of the law. Fragmentary memories came unbidden. She banished them.

Scarpirato watched her cut her position. Then he relented. He turned to Arnott, Wilson and Jensen and told them to sell, both the futures and the spot position. They hit their phones like rattlesnakes. In two minutes, they had sold out. The position was cut, the profit taken: $6,800,000.

They wrote the tickets and sat back exhausted, euphoric, grinning at each other. Sarah let their mood consume her. The sensation was almost sexual. They felt dizzy, triumphant. They switched off their screens and went to Corney & Barrow on Old Broad Street to celebrate.

The above extract from chapter 15 of Nest of Vipers was read by Linda Davies in her speech at the European Research Center's Financial Panel 1997 - Will the EMU Pay Off? Anticipating the Effects on the Market.

Go back to the rest of her speech, Psychology of Risk, Speculation and Fraud.

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Last updated 18 May 2007.