Chapter 25

Adam and I continued to work, as many hours as we could to fix the program, and make it easier to use. As I was reviewing the program, I had a new idea. So I went back through my flowcharts to see what I needed to change to support this new concept. I called Adam over to review the change. "Mike said that when they normally trade that they put limit orders in to protect themselves. I want the program to give a person the ability to make a decision. With this change, a person can simply flick a switch, or select to change the orders to market orders. We know that Market Orders execute as a higher priority at the next available price. If we know what the price is, and have those orders sent, they'd go at the quoted price. We might miss some, but the change would normally move us to the front of the line, and be more likely to execute. I want the specific ability to select which type of order to send, so I can execute one way, or the other."

"I think that's a great idea," he said. "We can test it the first day we run the program, and see which approach gives us better results. I need to meet with Mike to learn the format for placing orders on the various exchanges. If they can go in over the wire, I can code it in. If they enter them at the exchange manually, we want to make sure the format and order is correct to save time, and make sure that they execute the trade."

I called Mike, and he said that he could come by the next day. We decided that we'd meet him for lunch, and then bring him back to show him where we were. I didn't want him to show up at the building without an escort. We met at a deli, and then came back to the apartment. We showed Mike the demo, and asked about the ordering method. He gave us the details, while we took notes. We were ahead of schedule, and I asked if we could set it up to run some tests after Christmas, before we went back to school. He said that he'd make it happen since it was typically slow then. He liked what he saw, and Adam had the documents from our lawyer that he could take to his lawyer to have him review. Friday we continued our work. We spent more time looking at the UI (User Interface), than anything function related. We liked what we saw, and stopped for the day. I knew that my parents were coming in the next day, so we cleaned up, as best we could, but still worked on the program.

When my parents checked in, at the Ritz Carlton, at the south end of the park, I met them there. I gave them their building papers, so that they could come and go more easily. They came over to the apartment and were both interested in the program, so we explained how it worked. We then told them more about the stock analyzing software and the math software. When we started to mention the amounts we were making, they were proud and floored at the same time.

Dad asked, "How much are you asking for this latest software?"

"We think that it will be like printing money. The company has the powerful computers and the dedicated communication lines. Those lines connect with the various exchanges around the country and around the world. In reality, we actually need them more than they need us. It would not be difficult for others to design the application and write the software. We'd need a lot to set up the other parts. When we completed the negotiations, we received forty percent, for a guaranteed three-year contract. We can extend that contract out to seven years. If it comes up, they're responsible for fighting the patent suits, and we give them a share if we decide to share the software, or the courts' order us to do so."

"It sounds like you thought that through very well."

"Thanks."

Adam and I were very close to finishing the project, so I took breaks to visit with my parents. I stopped by their hotel, and my Dad had his own business meeting going on. He introduced me, but then Mom excused us, and we went down to the bar. She ordered a drink, and I had a soda. She asked about my birthday, and if I needed anything. I told her that she could buy me a car.

"I was planning on it after I backed out on the motorcycle last year. It doesn't make sense to have to beg a friend every time you need to go somewhere. Do I need to hire a diving instructor to make sure you can drive properly?"

"No, I already finished that. I know how to drive a stick shift, and the rules of the road."

"I'm impressed. What if I didn't buy you a car?"

"I would have gotten my own."

"You aren't old enough to buy a car."

"I know that, so I planned to have my company purchase a company car that I'd drive."

"That's what I like about you. You're always thinking ahead. You're solving the problems before they're in your face. That will do you well in life. You're also very observant. What've you observed lately?"

"I saw the need for the software that I'm now developing. I've also noticed that there are more women than men in this bar, who are looking for someone to talk to."

"The worst kept secret on the planet is that if you're looking for a woman, the Ritz Carlton bar is the place to go. If I weren't with you, I wouldn't come in here. Many of the women are looking for a friend and a quick romp."

"Isn't that true with most bars?"

"Not always true. The older women are looking for mostly young men. The old men are looking for mostly young women."

"That's good information to know."

We finished our drinks, and took a walk in the park. When we finished our walk, and returned to the hotel, we found that Dad had finished his meeting, and wanted dinner. I called Adam, and he told me that he'd just had a sandwich, and was doing well with his coding. We walked over, and had dinner at the Oak Room. I had the lobster bisque and a Caesar salad. Dad talked about his meeting, and some of the investments he had. He was a large shareholder in IBM and AT & T. His financial guys told him that those investments and the banking stock were all doing well. It was good to hear about all the things he was working on in Japan. I was glad that he was taking a month to relax with Mom.

I was back at the apartment by nine, and worked until Midnight. Adam and I were getting excited about how the program was working. To make things easier, he had added a reporting function. It would receive the trade confirmations, and add the matched pairs to a database. The program could sort the matched pairs by date, stock, bond, exchange, or profit. By using this report and viewing the program while it is in action, allowed us to see the program's performance.

To make sure that we finished the program, we continued to work. We finally stopped on Christmas at three in the morning. It was a pleasure to say that we had finally finished the program. When my parents arrived, we were both still asleep. It was not until later that we realized that we hadn't done such a great job of cleaning up when we'd finished. I woke around ten, and Adam was eating some pancakes that my mom had fixed him. He was telling her about finishing the program earlier in the morning. Dad was opening some champagne, and fixing mimosas for everyone.

Although we didn't have a tree, we exchanged gifts. Mom remembered that Adam liked music. So she bought him the latest albums that were out, according to the clerk at the record store. I was still growing, so I got clothes and a new watch. I gave Mom some earrings, and Dad a new Zero Halliburton briefcase. We went out for a late lunch, or early dinner, whichever way you wished to see it. Prime rib was the dinner of choice, for everyone, and the horseradish set it off perfectly.

We all went in separate directions after dinner. Before we left Mom let us know that on Saturday the 27, they were moving to Washington DC, for the rest of their trip. She said though that they would return for my birthday. Friday we did some more shopping, so we could pick up some last-minute sale items. Over the weekend, Adam and I tested the program. We found a couple of small things to fix, or change to make it run better. I felt tired on Sunday, so I went for a walk. There were still people across the street, but the numbers were dropping off. As I was walking, I went by the shop where I'd sold the pictures. I saw one in the window with a sign that all proceeds would be going to the John Lennon Memorial.

I walked over to Monzi's house to see if she was home. She was, and her mom invited me in. Shortly, Monzi came up, and gave me a hug. She then told her mom that we were going for a walk. As we walked, I noticed how quiet she was, and how she held my hand, for the couple of block walk to the park. She sat me on a bench, and then sat on my lap and started to cry. Not knowing what else to do, I just held her while she cried. When she'd had enough she said, "I didn't know how to reach you. I wanted to see you so bad, but when I walked over to your apartment, they wouldn't let me anywhere near it. I was so surprised at Thanksgiving when I saw the album that you had him sign for me. When I tried calling you at school, you must have been out or already left for the holiday. When I came home after his death, I saw the album, and have been sad ever since."

"I'm glad that you got to meet him, and have a memento to remember him by. I think that when he said life had its ups and downs, he was referring to your jumping all the time in volleyball. But it is something that you can easily view as life and death. It will be something special to you, I'm sure."

"It will be. Thanks. How long are you in town?"

"I'm here on business, but I don't have to return to school until January fifth. We can meet, for dinner, or a movie if you want."

"I'd like that. I'm leaving on Friday to head back to school. There are a couple of parties."

"We have a presentation tomorrow, so let's not plan anything. This way I won't have to break our date. I'll know how free I'll be after the tests and presentation."

"Can you tell me about it?"

"Not now, but after we've run the tests I will."

"OK. I needed to get out of the house, because I needed to cry, and not have my mom bug me about why I was upset."

I walked her home, and then went back to hang out with Adam. In the morning, Mike's car stopped at the apartment to pick us up. He snuck in the back way, and we rode with him down to the office. He showed me around while Adam and the IT guy got the software loaded on the mainframe computer. Adam found one last thing to fix. When he finished, we started the program. Although the there was no trading on the US markets yet that day, we had designed the software to work on all the global markets. It took Adam a couple of days to enter the stock symbols in the Symbol database and to enter the foreign stocks, as well.

Since we didn't know if the program was working, we were both standing there watching the computer lights, and looking very silly. I went over to the computer and clicked on the screen. I immediately noticed that there was an error message. After reading it, I said, "It looks as if the feed, for the international price conversions, isn't hooked up to the database." Adam and the IT guy went back to the computer. They re-directed the information that the program needed to work correctly. I continued to watch the computer screen. Suddenly, a light on the screen blinked, and the program sent off two orders at the market prices. A short time later, we had recorded the first trade of a thousand shares. Due to currency rate differences, the actual profit on the trade was ninety-seven dollars and sixteen cents.

Before long, the lights started to blink more and more. When the US markets opened, things went crazy. The average trade was eight hundred shares at an eighth. This amounted to twelve and half cents times eight hundred shares, or a hundred dollars. But we were averaging a trade every ten seconds, or six hundred dollars a minute.

We found one place where someone was dumping a stock on one exchange. Almost at the same time, someone else was buying on another. We ended up becoming the middleman. For each trade, we were making a quarter a share times fifty thousand shares. It was like watching a slot machine rain quarters out in to the tray. The program made $12,500 in three minutes. At the end of the day, we had six losing trades where the price moved before the program could complete our trades. After a while, just sitting there, I realized that I felt bored, so I started to brainstorm about other opportunities.

Mike and his arbitrage guy, David Hubbs, took us to lunch. They were just giddy over the number of trades that were executing. We were about half way through the meal when Mike looked to me, and asked, "You're awfully quiet Nick is anything wrong?"

"Yes and no. I'm happy with the volume and the fact that we're processing the trades as market orders, and not losing on too many. That makes me happy. It's working, as we designed it, but I let you and myself down in the design."

"We aren't let down. We've done before lunch what we normally do in a good month," David said.

"That's great. But, shouldn't we also include convertible bonds, options, or indexes in our program? If we had all the conversions in our system, we could buy a convertible bond and buy a put option. If the conversions were correct, we could make money without others knowing we were playing the stock."

"Holy shit, he's right. We're so new to the computers and the computing power. We've never even thought about doing something like that. I'll have a team established to start breaking down the different investment types in to the lowest common denominator. I know in theory that when you buy an index, you can cash it in for shares. If we did the calculations, we'd piss some people off, but in the end, we could make a lot of money. Finding the intrinsic value of an option isn't hard to do, but it will take a program to do the math continuously."

Adam said, "Options are a specific function of a combination of strike price and premium. I can make a table that would be faster than continual calculations. Nick is right; none of us thought this all the way through. This new idea has the potential to become big. Let's keep this program running, and then Nick and I will start on a version two. Mike can have his team start to break down the investments to find the equivalent investments. Once they complete that, and we can add those to the database. Mike's team will also have to keep up with new issues to keep everything current."

We made it back to the office, and one of Dave's guys was laughing so hard he was crying. Dave asked him what was so funny.

"I've had six calls today from the arbitrage divisions at other firms. They were asking if we were having any troubles today. He said that they hadn't been able to execute a trade all day. I told him that I hadn't been able to complete one myself either. I asked him to let me know if they figured out the problem."

"The computer works faster than people. It can recognize the opportunities and send off the orders at a faster pace. The market orders receive top priority, and beat whatever else comes in to the exchange. Mike, I think you need to ask your legal team to start developing a patent to protect this idea and software," Adam commented.

Mike nodded, and picked up the phone. He spoke to someone, for five minutes. When he finished the call he said, "We meet with the CEO and chief legal in thirty minutes. Dave, we're going to present this to the Executive Committee in an emergency meeting. Please gather all your data together. Nick and Adam, you're both coming, as well."

As he walked off to the executive conference room, David held a box of computer paper. Adam sat down and typed a few things, and a five-page report printed out. He tucked it in a file. We waited for Mike to finish a call, and followed him upstairs. Mr. Patterson was at the head of the table, and some other suits were sitting around the table. Mike pointed to two chairs off to the side, so we sat in them. Two other men walked in, and the last one closed the door.

Mr. Patterson said, "Mike Wells called this meeting. He wants to talk about a new program that we implemented this morning, and some potential problems that we might face, because of it."

Mike didn't bother to stand. As he sat there, he said, "We have been using some new software in our research department. It's helped us time our purchases and sales better. You've all seen the reports from that effort. Our customers, shareholders, and those of us here at the table have seen the benefits." He paused, and I saw nods around the room. Mike continued, "Adam Buckley developed the software at his high school. It was a part of his senior project, for statistics and computer programming. My daughter goes to that school, and she introduced us. Adam worked here as an intern last summer. His then freshman roommate, Nick Duke, helped him. Nick came to me a couple of months ago. He mentioned that he was working on another program that we might be interested in seeing."

"He was designing a program that would find arbitrage situations and execute trades. He negotiated that if we were to use his program that they'd receive forty-two percent of the net profit, and we'd receive fifty-eight."

"That seems awfully high. We already have fifty guys in that department."

"Alan, I know that you're the CFO, but let me finish. This morning, we started up the program. We wanted to see if it would match up with our database. Under normal circumstances, we normally can make about seventy-five trades an hour. For those trades, we end up with an average profit of fifty dollars a trade. That's three thousand seven hundred fifty dollars an hour. The salary of the fifty guys is around seven hundred and fifty dollars an hour. Our profit is the other three thousand. We make less in off hours, because of the exchange rates and delays in getting information."

Mr. Patterson asked, "How did the computer do?"

He looked to Dave, and Dave said, "I haven't been able to add it all up, but we're averaging about three hundred and sixty trades an hour. This is giving us a profit of around a hundred dollars a trade, or thirty-six thousand dollars an hour. The best part is that we need only a few guys to run the desk now. We had one fluke early on, and made over twelve grand in three minutes from one trade, or series of trades on one stock."

Alan the CFO said, "I don't see the problem."

Mike said, "As part of our agreement, we agreed to protect the patents and copyrights on behalf of the authors of the software. In exchange for that, we receive exclusive rights to use it. We've always had the top arbitrage desk on Wall Street. But there hasn't been another firm in town that has executed an arbitrage trade all day. They're going to come after us, or try to copy what we're doing. So we need to make sure that we're ahead of this, like yesterday."