The Last Hedge (9 page)

“I hope you’re kidding.”

“Mr. Kay?” Dylan asked.

“Please, call me Johno.”

“Johno, I was wondering about something. Ray told me you ran an online Internet casino.”

Jonathan stopped in his tracks and looked at Ray. He then turned towards Dylan and smiled. “Yes, I do. Allegiance Gaming. Have you heard of us?”

“I think so. I don’t play online, but I like to gamble a little bit. I’m also something of a technology buff. I’d love to see your operation.”

Ray and Jonathan looked at each other. Jonathan eased out a hearty laugh. “Why not, my friend. After all, it’s right up the road.”

They returned to the car, and Dylan and Ray seated themselves in Kay’s Range Rover. They drove for ten minutes and arrived at what looked like a cross between an office park and an industrial storage facility. Three large one story buildings had been constructed out of corrugated metal, much like at a construction site. The largest of the buildings was probably ten thousand square feet. Jonathan Kay parked his Range Rover in front of the biggest building, and the three men exited the vehicle.

They entered the building through a secure door that required Jonathan to press his hand to a palm reader. Once through the front door, they also passed a machine that looked like a combination metal detector and X-ray machine. Once Dylan and Ray had passed through the machine, a security guard dressed in black nodded to Jonathan that they were okay.

“Quite a security force you have.”

“When you’re moving tens of millions a day, you can’t be too careful.”

“I guess not,” Dylan said.

They were walking down a white corridor, with office doors on each side. Kay was silent. At the end of the hall, they came to another door and another security guard.

“Good evening, Mr. Kay.”

“Hello, Richard. These are my guests.”

The guard gave Ray and Dylan a sidelong glance. He then turned and entered a number on a numeric keypad.

Behind the door was a room the size of a football field. In the distance, in the center of the room, sat an office encased in glass. Inside the glass office, six or seven people toiled, sitting at screens and monitoring plasma TV screens. To Dylan, it was a cross between Mission Impossible and a control room at NASA. Kay guided them towards the glass office. They stopped about five feet from the glass. No one behind the glass wall acknowledged their presence.

“So this is it?” Dylan asked.

“Yes,” Jonathan said. “Welcome to Allegiance Gaming.”

They walked towards the glass walls. Dylan could see the people inside. They were surveying the screens and monitors as if their lives depended on it. Ironically, it reminded Dylan of a trading floor. “What are they doing?”

“They are maintaining the site; making sure everything is operating properly. Making sure we are making money.”

Dylan placed his nose to the glass. From what he could tell, all the screens had numbers and spreadsheets up. Dylan counted four men and two women, all in their twenties or thirties. Strangely, all of the workers were as waspy as Jonathan Kay; no one was brown, yellow or beige-skinned, as if the Mayflower had docked in Antigua without telling anyone. Dylan turned towards Kay with a curious expression.

“I take it you don’t hire locally?”

“Nah, problems with the language barrier, etc.”

“Can we go inside?”

Kay turned towards Dylan and flashed his beaming smile. “I’ve shown you how I make my money, now it is time for you to show me how you make yours.”

“Good point,” Dylan said.

Ray looked at his watch. “Let’s head back.”

“Good,” Jonathan said. “I’m ready to hear what your boy Dylan has to say.”

Back at the house, the trio adjourned to Jonathan’s study. It was a wood-paneled affair, just off the living room. The study must have consisted of over ten thousand books, probably only a few of which had been read. They seated themselves around Jonathan’s cherry oak table.

“So what have you come up with, gentlemen? I’m already in the red by fifty million. How are you planning on making me whole?”

“The oil market moved against us unexpectedly. It wasn’t our fault.”

“Then whose fault was it, Ray? OPEC’s? Hugo Chavez’? Chairman Mao’s?”

“The markets have been unpredictable.”

“Yes, but it’s your job to predict the markets. This is why you have a house in Aspen.”

“I understand that. And that is why I brought Dylan with me: to walk you through the new strategies.”

“Gentlemen,” Jonathan said, folding his arms behind his head, “I am all ears.”

“Okay,” Ray said, looking towards Dylan. “Here we go.”

Dylan spent well over the next hour speaking on various types of technical strategies. Arbitrage is the simultaneous buying and selling of the same product at the same time in two distinct marketplaces. Because of pricing inefficiencies, it is sometimes possible to buy at one place in the world and, at the same time, sell it for a higher price on different exchanges. When executed perfectly, little risk is involved, as the transactions occur at the exact same point and time, therefore offsetting each other. Statistical arbitrage, a strategy used by many hedge funds, uses varying mathematical and statistical models to devise trades based on selling certain securities, while buying their statistical matches.

“So, many hedge funds were and are still using various statistical arbitrage strategies. They have a model, the model executes the trades. Well, the problem is, the same guys were making the exact same models, and trading the exact same stocks. So when everyone sold these stocks, the models tanked, and when everyone bought these stocks, the prices rose. In other words, with everyone doing the exact same thing, no one was making money anymore. Well, we use many of these techniques, but we employ a little more technical pizzazz.”

All through the presentation, Ray sat there pensively, alternating private looks between Jonathan and Dylan. Meanwhile, Jonathan sat there smiling with his arms folded, occasionally shaking his head or nodding all the while with a skeptical look on his face.

“So?” Ray asked nervously. “What do you think?”

“I think it’s a start. I think your ideas have a lot of promise.”

“Okay,” Ray said nervously. “Can you expand on that?”

“What can I say, Ray? There is only so much alpha or profit in the marketplace. It seems to me that this technical trading strategy is maxed out.”

Dylan sat back in his chair and took a deep breath. He smiled as he leaned forward and began to explain. “I can assure you there is still room in the marketplace for this type of strategy. Let me explain a more. The kind of trading we do is on a very short time-frame ... maybe fifty to one hundred round trips in a trading day. If you look a random stock in the market, the fundamental data about that stock doesn't change from moment to moment. But its share price does, and that is mostly from imbalances of buying and selling, down to basic selling at the intra-second level. So in theory, the guy who has the best ability to translate this intra-second information has an edge. I like to say that information equals equity, and the cool thing about the market is, well … Imagine this ... I know you like to play poker, so I’ll give it to you in your terms.”

“You sit down at a poker table and everybody has the same data. You can see every action and reaction, your cards and the commons cards. You know how much money each person has on the table. And the winner in the game is usually the guy who can best process that data. He can calculate odds, pot odds and implied odds, and he knows enough game theory to react to his opponents’ bets and raises. Now let me lay out for you a dream poker game: It’s a heads up match between you and me. There are no blinds or antes. I get to see my cards before I see the hand. Once I see my cards, I can bet any amount I want, and always be called. I can always raise and always be called, and you can never bet, raise, or fold. You will always call when I bet. How does that sound?”

“Sounds like a pretty good game.”

“This is the game I play, and it goes on twenty-four hours a day five days a week on big computers around the world. If you have the technology that can process the data into better information, you can win. And the game doesn't get tougher. Whether you're trading one hundred dollars or a million dollars, the game always stays the same. We have spectral analysis tools that stealth fighters use to track smart missiles traveling at Mach 2. If it can track that, I think we can have good results on the S&P.”

Jonathan shook his head as if he were impressed. “Cocky, huh? That’s how I like ‘em. So you think you can do the same thing again?”

“In the right types of trending markets, we will make money.”

“What kind of odds are you going to give me?”

“I don’t quote odds. Odds are for gamblers, and I don’t gamble, except when I’m in Vegas.”

“You don’t gamble? Then what the hell do you think you do for a living?”

“It’s not gambling if you have a huge edge. And my edge in the markets is pretty large.”

“You went to Harvard. You know where I went to school. It’s called the school of hard knocks. I couldn’t even get a job trading today, do you know that?”

“You might get an internship,” Ray said.

“Cutting weeds.” Jonathan looked squarely at Dylan. “What I do down here must seem awfully shady to a Harvard boy like yourself.”

“I try not to pass judgment.”

“You want my money. Let’s gamble for it.”

“This is how you’re going to decide whether to invest?”

“You got a better way?”

“Oh, I don’t know. Past earnings? Performance?”

“If I looked at his past performance, he’d never get a dime.”

“You have a valid point,” Ray said.

Jonathan laughed. “Besides, I thought you had some gamble in you?”

“I do.”

“Good. Glad to hear it.”

Jonathan got up and went to a bookshelf. On one of the shelves was a black box. Jonathan removed the box from the shelf, and returned to the table and sat down. After he had removed the cards wrappers, he reached back into the box and removed a tall stack of gold poker chips. With a quick whip of his hand, he divided the poker chips into two neat stacks. He pushed the chips towards Dylan.

Dylan picked up and examined the chips. The chips were not really chips, but gold coins, Krugerrands in fact. Rich men played poker with solid gold chips. Dylan couldn’t help but laugh.

“Nice chips.”

“Five for you, five for me. We both open the hand with one apiece. Ray, you deal the cards.” Both men threw one coin on the center of the table.

Ray took the cards in his hand and began to shuffle them.

“We’re only going to play one hand.”

“One hand?”

“That all it should take.”

Ray took the cards and dealt them out, two to each man. Jonathan looked down at his two-hole cards. He then looked up at Dylan and smiled.

“I’m all in,” Jonathan said.

“Okay,” Dylan said. “I call.”

Jonathan turned over his hand to reveal a pair of tens. Dylan flipped over his cards to reveal and ace and a deuce.

“Nice hand,” Dylan said.

“I guess we have to flip a coin.”

Ray dealt out the three cards, a jack, a seven, and a four. Neither of their hands improved. Ray hesitated before dealing out the last two cards.

The turn card was another seven. Ray looked up before dealing the last card, the river.

Ray placed the card on the river face-down. He then flipped it over to reveal the black ace of spades, giving Dylan the winning hand.

“Nice hand, sir,” Jonathan said, as he got up from the table.

“I was wondering where the ace was.” Dylan scooped all the Krugerrands towards him. “May I keep the coins?”

“Souvenirs on the house.” Jonathan got up. He left the room without looking back.

“Luck,” Dylan said, “valuable in poker, sometimes in trading.”

“Someone like you doesn’t need luck, Dylan. You have all the talent in the world.”

“Yeah, well, remember that at bonus time.”

Ray said nothing. Dylan noted it was the first time he had smiled that evening.

Dylan’s room that night in Kay’s mansion was on the third floor. After the card game, both Dylan and Ray decided that it was too late and too difficult a drive back to the hotel. Raul had shown Dylan to his bedroom on the third floor, and he crumpled onto the bed. He then proceeded to toss and turn for the better part of an hour.

His thoughts were mired in the meaning of the trip, and the strange feelings about Jonathan Kay. Though every surface question had been answered, he still felt a lingering doubt about the day’s activities. He placed the laptop on the small desk in the room and plugged the tether cable into his phone. He powered on the computer, and within seconds he was online. He quickly did a search for Allegiance Gaming Online.

Allegiance Gaming was currently ranked as the #8 online gaming site in the world. Little was known about it. It was a shell of corporations within corporations based out of Antigua. The site was closed to U.S. residents. The company had licensing agreements with similar sites throughout the world, though it had only been around for several years. Amongst its competitors, Allegiance seemed to be a niche site that catered to higher limit gamblers. Though it was speculative at best, the article placed the online revenue from the site to be around half a million a day. Allegiance was not the largest player in the online gaming world, but not the smallest either. Only one of the articles mentioned Jonathan Kay.

Dylan turned off the laptop and placed it in his bag. He then sat back down on the bed. Whatever he had thought of Jonathan Kay, the business he claimed to own was real enough. Despite the questionable nature of how he had acquired his funds, he didn’t do business in the United States. From what Dylan could tell, his money was legitimate. Yet Dylan was still on edge. Unable to sleep, he headed outside.

He found the staircase just to the left of the door; right next to a room that he believed to be Ray’s. The door was closed. Dylan made his way down to the first floor by holding onto the handrail. As he reached the ground floor, he heard the faint sound of someone moving in the distance. The room was completely dark, and it was hard to tell where he was going. Before long he found himself in the kitchen.