The Spider Network

by David Enrich

  In addition to doing some trading himself, Pieri now was responsible for twenty-seven traders and salesmen. Among them was a young trader named Mirhat Alykulov, who had arrived at UBS as a temporary worker before being admitted into its trader training program in April 2006, shortly before Hayes moved to Tokyo. Alykulov had grown up on a chicken farm in Kazakhstan. A promising student, he was admitted into a high school exchange program that sent him to the Pennsylvania village of Quakertown, where he joined the high school wrestling squad and picked up something resembling an American accent. Back in Kazakhstan, he won a coveted scholarship to go to college in Tokyo, where he learned Japanese and was a member of a championship English-language debate team. From there he ended up on UBS’s trading floor. Pieri had grabbed him for his interest-rates team as part of the effort to expand after the Bank of Japan hiked rates earlier in the year. Now Alykulov was seated near Hayes, who, with the title of director, was two rungs above him.

  Almost immediately upon his arrival at UBS, Alykulov, with his unusual name and hard-to-place Eurasian looks, was bestowed with a series of nicknames. One was “Derka Derka,” which derived from a common refrain in the deliberately offensive 2004 movie Team America: World Police. (The film was wildly popular among traders and brokers who reveled in their political incorrectness.) The Team America puppets depicting Middle Eastern terrorists used the phrase “Derka derka Muhammad jihad” instead of speaking actual Arabic. Alykulov wasn’t an Arab, and Kazakhstan isn’t in the Middle East. No matter. “Haha, that’s great,” Pieri said when he learned of his subordinate’s nickname.

  Alykulov looked up to Hayes, who was a few years older and enjoyed a reputation as a superstar in the making. (Plus, Hayes never called him Derka Derka.) The following summer Hayes would become the Kazakh’s supervisor, a relationship that would yield life-changing results for both men. In the meantime, Hayes thought the junior trader, with black hair and a short, slightly pudgy build, was unremarkable. Women, however, found him quite appealing, resulting in a succession of attractive, pouty-lipped Japanese girlfriends.

  * * *

  Hayes’s first day of trading was September 29, 2006. He was tasked as a market maker responsible for handling derivatives linked to Japanese interest rates—in other words, helping UBS customers fulfill their buy and sell orders by building up an inventory of the products and then managing the associated risks via hedging against unfavorable swings in rates. But, as always, wagering the bank’s money on the future directions of interest rates was at least as important. The rapidly expanding universe of swaps, futures, and other derivatives flooding the market allowed financial whizzes like Hayes to make massive wagers on the directions of rates in different currencies and over different time periods. It wasn’t as simple as predicting the Bank of Japan would hike interest rates at some point in the future. Instead, Hayes organized his bets around derivatives that would deliver profits if, at a specific date, the difference between two interest rates—say, those in the United States and those in Japan—narrowed or widened by very precise margins. Hayes might wager that U.S. dollar Libor might fall relative to yen Libor. Other classes of trades tried to profit from predicting the convergence or divergence between different time periods of yen Libor—say, whether one-month Libor would rise relative to three-month Libor—or, even more complicated, whether the difference between one-month and six-month Libor would be greater three months or six months in the future. Hayes loved the challenge; it was like trying to complete a three-dimensional jigsaw puzzle whose pieces constantly changed shape.

  The nature of the instruments Hayes was trading meant that his fate was chained to Libor, but it wasn’t the only benchmark that mattered. By then, Libor’s success and the BBA’s marketing efforts had inspired even more local variants all over the world. In Brussels, there was Euribor, tied to the euro. Hong Kong had Hibor, Singapore had Sibor, Hungary had Bubor, and South Africa had Jibar, to name just a few. Each rate was determined by an association of banks, both homegrown ones and those with substantial local presences. These were all separate from Libor and the BBA and generally were run by the local banking associations in those countries. The Japanese Bankers Association administered Tibor—the Tokyo interbank offered rate—which was an ingredient in many of the derivatives that Hayes and his counterparts were buying and selling. (Whereas yen Libor was supposed to measure what banks would pay to borrow Japanese currency from each other in London, Tibor measured borrowing rates in Tokyo. The bigger difference was that yen Libor and Tibor were based on different groups of banks providing data, and they therefore didn’t move in lockstep.) Tibor became one more roulette table for traders.

  Hayes started out his UBS trading conservatively. Always prone to anxiety, he had been scarred by the RBC episode. He felt such acute pressure, such paranoia, that he would get nauseous as he squeezed onto Tokyo’s crowded subways each morning. He didn’t sleep well, waking up multiple times each night to check movements in the U.S. markets. At the end of each day, when he had to assess the profitability of his trades and assign values to the assets he was still holding, he erred on the side of making them seem less profitable than they actually were. (These were just estimates, so Hayes had some wiggle room as he valued the positions.) Each evening, Pieri eyeballed Hayes’s summation of that day’s profits and losses. But no one looked at Hayes’s individual trades. He was struck by the laissez-faire attitude—UBS clearly trusted him to do the right thing.

  Hayes’s team was on a floor that also included specialists in trading currencies, commodities, and bonds. The entire group would go out for beer-and-bowling nights three or four times a year at the Tokyo Dome Bowling Center, next door to the indoor stadium where the Yomiuri Giants baseball team played. These were among the few work events that Hayes genuinely enjoyed. He grudgingly went along to other such gatherings, but without much enthusiasm or effort. Once, at a dinner some colleagues had organized, he showed up lugging a thick economics textbook, which he spent the meal reading.

  With as many as twelve computer screens and two keyboards, Hayes’s workstation looked like something out of a sci-fi film. He had several monitors tracking different relationships between different market indices. Numbers whizzed up and down the screen as trades elsewhere in the market were reported. Charts moved. Color-coded, interactive Excel spreadsheets were open in the background. And then there were normal Web browser windows, and a couple of screens running chat programs and e-mail. Two humming computer terminals—and sometimes a third as well—powered the whole setup, with one machine devoted to making his Excel models run lightning-fast. His personal intercom system barked with a constant flow of data from brokers and colleagues. The monitors cast a glow on Hayes’s scruffy face as he stooped over his desk, shoulders tense and hunched as he glared at his screens. He reminded a colleague of the Neo character in the Matrix trilogy: “He could just see these numbers.”

  The corner of the trading room in which Hayes, Pieri, and Alykulov sat was laid out in a deliberate fashion. The guys responsible for submitting the bank’s daily Tibor data to the Japanese Bankers Association were seated next to the traders, like Hayes, who were making wagers that depended largely on the movements of Tibor and Libor. In some cases, the Tibor submitters themselves were making those trades. It wasn’t hard to guess the result. Long before Hayes arrived in Tokyo, the submitters and the traders had realized they could help each other out. It had been common practice at UBS for traders to ask their deskmates to nudge Tibor in helpful directions, and to ring colleagues in other parts of the UBS empire for help moving Libor. Those colleagues didn’t have to comply—they could have reported something resembling the bank’s actual borrowing costs—but who wanted to be the martyr, the goody two-shoes, who interfered with traders raking in profits for the bank?

  In addition to watching his colleagues interact, Hayes had an unobstructed view of UBS’s trading positions and how they intersected with its Libor submissions. Always adept at spotting patterns, he quickl
y realized that the bank was moving its submissions in ways that benefited its trading positions. That didn’t seem like a coincidence—in fact, Hayes had noticed the phenomenon back when he was at the Royal Bank of Canada. At one point, he’d asked an RBC manager about UBS’s seemingly odd submissions, which happened to be hurting Hayes’s own trades. His manager bluntly told him it was because of the Swiss bank’s trading positions. Hayes wasn’t the only one who noticed. Eighteen months before he joined UBS, a client had complained to the bank about its self-serving Libor submissions. “It’s our natural right,” the UBS employee shot back. “Any other bank will do the same.”

  One afternoon that September, Hayes was chatting electronically with a Tokyo broker named David Perfect. After disappearing for a couple of hours, Hayes returned and explained that he’d just been on an expedition to procure a Japanese cell phone and contract. It had turned into an adventure—unable to understand what the guy at the phone store was saying, he’d ended up just randomly selecting a phone plan.

  “Not sure what I’ve signed up to,” Hayes reported. The broker sympathized—communicating with the Japanese, even those who spoke English, could be mind-boggling. Perfect offered advice on how Hayes could save money on his international phone calls. Then their conversation turned to work. Hayes, in the process of building his Excel models, grumbled that he was having trouble figuring out the trajectory of interest rates.

  It’s “very, very hard to price stuff with the fixes”—trader shorthand for benchmarks like Libor—“being so manipulated and inconsistent,” he complained.

  “The fixes are manipulated?” Perfect deadpanned.

  “Yes, of course they are,” Hayes said, not picking up the sarcasm.

  “Kidding,” Perfect clarified.

  “Just give the cash desk”—the guys responsible for the bank’s Libor submissions—“a Mars bar, and they’ll set wherever you want,” Hayes went on, still oblivious. “They are usually staffed by fat people.” He was kidding, kind of. For more than a decade, traders and brokers had used the punch line of giving the cash desk a Mars bar as shorthand for the well-established pattern of derivatives traders pleading for favorable Libor submissions.

  And so on his first day of trading, as Hayes chatted with Terry Farr, he threw in a casual aside: “Do me a favor today and get Libors right up.”*

  “I’ll do what I can,” Farr responded.

  * * *

  Many of Hayes’s contacts with brokerage firms—guys like Read and Farr—remained in London. Depending on the time of year, and whether daylight savings was in effect, Tokyo was either eight or nine hours ahead of the British capital. As a result, it wasn’t until Tokyo’s evening trading session that most of the London brokers arrived at their offices. Unless, that is, the brokers radically adjusted their schedules to suit their clients’ needs. Because his primary clients were focused on the Tokyo markets, Read tended to arrive at ICAP’s London offices around 3 a.m. and then work a twelve-hour day before beating the rush-hour commute home. That was far from ideal; most nights, he got less—sometimes much less—than five hours of sleep. But it soon grew worse. With Hayes now in Tokyo, Read started arriving in ICAP’s darkened offices shortly before midnight. He would switch on the lights and then spend the next five or six hours in isolation, the only one on the vast brokerage floor, until some of his early-bird colleagues started trickling in. Most days, he stuck around till noon, ensuring that he overlapped for at least a few hours with all his colleagues, before trudging home and grabbing a nap before his sons returned from school around 4 p.m. It wasn’t a recipe for a happy family. Joanna, who had given up her career as a court clerk to look after the kids, was feeling more and more like a single parent.

  One morning in October 2006, Read was alone in the office when he heard from Hayes. Outside, the London sky was still dark, and a thick mist hung in the air. Hayes had continued his bizarre—and reckless—practice of spilling his guts about whatever he was trading. To brokers, the information was like gold; they cannily shared it with grateful clients, and the smarter, more entrepreneurial brokers—men like Read—were able to anticipate related transactions that might appeal to traders and then pitch them as opportunities that had suddenly popped up in the market. Now Hayes confessed to Read that after trading for less than a month at UBS, he was already encountering trouble. What he would do for the six-month version of yen Libor to go down slightly! Otherwise he stood to lose a bundle of money. Normally, someone in Hayes’s shoes might have just asked UBS’s own Libor submitters for help. In his previous jobs, it had been second nature for him to talk to the guys on the cash desk. Hayes had sat near them, and they were a valuable source of market intelligence. The problem was that at UBS, the Libor submitters were based in cities all over the world—Zurich, London, Singapore—but not Tokyo. (Only the Tibor submitters were stationed in Tokyo.) As a newbie, Hayes had no one to turn to.

  Except for Read. Hayes knew that he and his ICAP colleagues were plugged in when it came to Libor. In fact, Read at times had noted to Hayes that he had an acquaintance at a German bank, WestLB, someone he’d known back in school, who now was involved in that bank’s Libor submissions. Now Read had an idea. It involved his ICAP colleague Colin Goodman.

  After quitting school at age eighteen, Goodman had started in finance as a bank clerk back when Hayes was a toddler. Bored, he saw a newspaper ad for an entry-level brokerage job at a company that later would become part of ICAP. His application was successful, and he started in 1984 as a trainee. From fetching sandwiches and making coffee, he climbed, very slowly, through the ranks. By the time Read first interviewed for his ICAP job a few years later, Goodman had sat in on the meeting. By now, working in ICAP’s yen derivatives team, he was a veteran. Goodman—who had a long, narrow face, a chin so weak it was nearly invisible, and thick brown hair that he carefully parted on his left—was renowned for his drinking. (So well known was his penchant for downing a bottle of Australian Shiraz over a long weekday lunch that a colleague christened him “Lord Luncheon.”) Despite his imbibing, Goodman was an early riser. At 5:25 a.m. every day, he caught the first British Rail train going from the suburbs into London’s bustling Waterloo Station. From there he hopped on the Tube to get to ICAP’s offices by 6:30 a.m. His first task was to check in with traders and brokers in Tokyo, Hong Kong, and Singapore to get a feel for where transactions were taking place in the market, and at what prices. That knowledge was key to his ability to tell other clients about where markets had been and where they were likely heading. Around 7 a.m., he sent out an e-mail called a “run-through” to a slew of bank traders. The dispatch contained a simple spreadsheet—basically just a box of numbers—pasted into the body of the message. It listed where every tenor—the technical term for time period*—of yen Libor had stood the past day or two and where Goodman expected it to end up that day. He called that last figure “Suggested Libors.” Each morning, he prefaced the data with the same simple note: “GOOD MORNING YEN RUN THRU.”

  The run-throughs had been an ICAP fixture since the late 1990s. Before long, ICAP’s marketing team had sensed their commercial potential. Every so often, an executive traipsed around to a bunch of banks and touted the run-throughs as a valuable service ICAP provided important clients. And so the number of recipients on Goodman’s run-through list grew. Libor submitters received it. Derivatives traders received it. Even Bank of England officials received it.

  Read and Goodman had realized something interesting about the mundane run-throughs. Employees at some banks—including Citigroup, J.P. Morgan, Royal Bank of Scotland, WestLB, and Lloyds in Great Britain—who were in charge of submitting Libor data sometimes appeared to simply copy ICAP’s data rather than go through the onerous process of coming up with their own hypothetical estimates of what it would cost to borrow across different currencies and time periods. Relying on the run-throughs represented an enticing shortcut. And because of the inherent subjectivity of the Libor estimates, nobody was likely to noti
ce.

  But Read and Goodman did notice. (So, apparently, did Read’s manager, Danny Wilkinson, who informed his bosses in 2006 that “banks are becoming dependent on ICAP for Libor calls.”) Once, when Goodman’s run-through contained a typo, suggesting six-month Libor at 1.10 instead of 1.01, Read noticed that Citigroup and WestLB copied it, even though it represented a huge leap from the previous day’s level. When Goodman corrected it the next day, the banks again followed suit. In other words, the laziness of a few bank employees—“sheep,” as Read sometimes called them—meant that ICAP’s run-throughs had a startling amount of real power. If Goodman’s e-mail contained slightly inflated Libor estimates, for example, there was a good chance a few banks also would submit higher data. That would nudge the overall benchmark higher. To traders like Hayes, even a shift of 0.01 percentage points—or one basis point, in the lingo—could be worth hundreds of thousands of dollars. For anyone with a contract whose interest rates or payouts were linked to Libor, significant money was on the line.

  So Read told Hayes that October morning that he might be able to help.* He didn’t mention the exact plan, only saying that his colleague Goodman would do what he could to spread the word that Libor seemed to be heading lower. That sounded great to Hayes, who mentioned the idea to his boss, Pieri. “That’s good news,” Pieri affirmed.*