The Icarus Prediction

by RD Gupta

  Jarrod nodded to his team members as he took off his suit jacket and draped it over the leather swivel chair.

  Coffee spontaneously appeared in a china cup on his desk from his assistant, Gwen. Unlike the trendy fashion-mavens favored by most partners in the firm, Gwen was an acerbic, middle-aged Jewish grandmother who’d seen it all and was smart as a whip. She’d recognized Jarrod early on as the new rising star and hitched her wagon to his when her previous boss flamed out with a coronary at the ripe old age of forty-seven.

  As a principal in the firm, Jarrod was entitled to an office. Had one, in fact. But trading was nothing but the monetization of information, and the closer you were to the raw information, the greater your chances of success. Jarrod often chuckled at how CNN and CNBC postured themselves as purveyors of the immediacy of financial news. In fact, by the time any trading news hit the news wires, that monetization train had already left the station. Trades in stocks and commodities were precursors of news, not the other way around.

  Jarrod remembered when the Pentagon had experimented with “terror futures” as a means to identify impending terrorist attacks—i.e., providing investors a way to, say, bet on a biological attack on Israel. Congress put the kibosh on that politically incorrect idea, but the official Pentagon statement on the debacle actually rang true: “Research indicates that markets are extremely efficient, effective, and timely aggregators of dispersed and even hidden information.”

  Jarrod had taken that to heart but went one step further. Successful trades meant going upstream to obtain data that was three days old when it hit CNN—an eternity in the trading game. So he had created a “flat” organization chart in his department that focused on energy trades, calling for immediate cross-fertilization of data from him to the lowly analyst and back again. No bureaucracy. No formality. Just information and actionable intelligence. Still, everybody knew he was the boss.

  Jarrod turned to one of the newly hired business school graduates in his group, Mark Watson, who was analyzing an inventory chart on one of his monitors. “Hey Melvin, Did you catch that insane buzzer beater last night?”

  The response was delivered with a mixture of respect and underlying resentment.

  “No, I was busy working on the inventory data you asked me to compile… late last night. And you know my name is Mark, not Melvin!”

  Jarrod didn’t miss a beat, “Good Answer Melvin, any other response would have gotten you fired on the spot.”

  Mark mumbled under his breath, “Good, go fire Melvin then.”

  Jarrod couldn’t help crack a smile knowing he’d gone through the same ribbing only a few years ago.

  He turned his attention to the broader team and raised his voice a few decibels.

  “OK, how are things shaping up?”

  “West Texas Intermediate up a quarter and holding just under seventy-nine,” replied Chet Delaney. Delaney was his Wharton wunderkind who knew more about the stats of the domestic market than the CEOs of Exxon and Chevron did.

  “Inventory movement?” asked Jarrod.

  “Reports just in. Refinery outflows appear to be outpacing deliveries by 1 to 2 percent over the last forty-eight hours.”

  Jarrod sighed. If the refiners would just provide web access to their inventory databases, it would be so much easier. But they didn’t, so Blackenford subscribed to a service of “watchers.” Outside major domestic refineries, a number of remote surveillance cameras watched the traffic going in and out. On the Houston Ship Channel and the Mississippi River, another set of cameras kept track of oil tankers unloading their cargo of crude via the submerged pipeline.

  Jarrod’s crew knew the capacity of every floating tanker on the high seas. And the tanker capacity of eighteen-wheelers was standard. So when you did the math—something Jarrod’s crew did very well—you could figure out whether refinery stockpiles were growing or decreasing. Growing inventories meant less pressure to refill them, which caused prices to slip. It was simple supply and demand. Broader factors could come into play, of course—weather, economic trends, terrorism, elections, OPEC etc. But in a peaceful world, inventory trends were the best bellwethers.

  “The firm’s position?” asked Jarrod. Although he knew it, he liked to hear it.

  Delaney replied, “It’s 9.52 million barrels long at 68.50. At a gain of 10 dollars and 29 cents per barrel, the return on this trade is positive 98 million less 8 million for the hedge, leaving a net gain of 90 million minus fees.”

  It always amazed Jarrod how those dancing numbers on those screens could create wealth out of thin air. Ninety million dollars inside of thirty days. Not bad for a month’s work. Indeed, it almost seemed criminal. But this seemingly effortless way to make money had only come after Jarrod turned himself into a highly successful stock trader and continuously pressured his team to do more and to do it faster than anyone else.

  It had started three months ago when Jarrod had picked up on a wrinkle no one else seemed to notice in the ocean of data his team monitored in the hurly-burly of the Iran situation. An obscure press release by Tribeca Shipping stated the company was phasing out some of their older tankers and upgrading their entire fleet with newly constructed vessels. Separate and distinct from that, via his back-channel contacts as a CIA alumnus, he’d heard something had occurred in Saudi Arabia that was yet to hit CNN. A food riot had broken out in al-Kharfah, a small village in the Saudi outback, and neighboring villages were close to joining the party.

  Most Westerners considered Saudi Arabia to be a wealthy welfare state. In fact, the wealth of the nation was largely siphoned off by about seven thousand royal princes, leaving millions in abject poverty. The royal family used the jackboot to keep the populace suppressed, but when the Saudi riyal was devalued and food prices went up, those who had nothing to lose rebelled.

  Having learned how the Arab mind worked in his days with the Agency, Jarrod swung into action. First, he took the firm’s Gulfstream and high-tailed it to Galveston and then to Baton Rouge. He made himself look like a longshoreman and staked out the docks until he found a Tribeca tanker. He followed some crewmen to a dump of a bar and started buying rounds of shots to get the inside scoop.

  “Yeah,” the crewman said. “The old girl is going to be cut up for scrap, they just told me today.”

  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 onlin
e, the capacity would spike, flooding the market with an 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 he 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 every day. Within a few days, we could exceed 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.”