I just read Susan Beck’s piece at the American Lawyer reflecting back on 25 years of legal journalism. That prompts this odd post.
The year is 1987. There’s a hearing in a court in San Francisco that will likely affect the price of a publicly traded security. An arbitrage house retains us: “We must know the result of that hearing first — the instant the information becomes public. We want to be able to trade before our competitors can act on the news.”
What do you do?
You and a colleague arrive at the courthouse an hour before the hearing will begin. One of you goes to the pay phone on the second floor of the courthouse — down the hall from where the hearing will be held — and gets on the line to New York. That person is about to hold an open line to New York for three hours.
The other of you goes into the hearing room, elbowing your way to a seat in the back, near the door. (It’s like the sign outside the country church: “Services 9 am Sunday. Come early for a seat in the rear.”) The hearing lasts a couple of hours, and the judge announces the ruling. All of the lawyers and arbitrageurs push through the door and run down the hallway.
Ha! All of those other guys curse as they run past your guy, who’s holding the open line to New York! You get on the phone and explain the decision. The guy in New York says: “Repeat that.” You repeat it. The guy in New York shouts: “Buy!!!”
And all of the other lawyers and arbs are just now jostling out of the courthouse doors downstairs, heading to the Greyhound Station across the street, where there’s a bunch of pay phones.
So your arbitrageur-client is a happy man, and he retains you again several months later . . .
A case is under submission after a bench trial in federal court. No one knows when the decision will be handed down. But everyone suspects that the decision will affect the price of a publicly traded security.
Your client’s words are familiar: “We must know the result of that trial first — the instant the information becomes public. We want to be able to trade before our competitors can act on the news.”
What do you do in 1988?
You hire a kid for seven bucks an hour to stand in the clerk’s office at the courthouse and look at the caption of every decision that the clerk places on the counter, which is how decisions were made public back in the Stone Age. When the kid sees a decision with your caption on it, his job is to pick the decision up, go to the pay phone in the hall, and call you. (If you’re not at your desk, he has the names of other lawyers who will cover in your absence.)
The kid stands in the clerk’s office from 9 to 5, five days a week, for six weeks, checking the caption on every decision as the clerk places the papers on the counter. In the middle of the sixth week, the kid calls, and he reads you enough of the decision to give you comfort.
You call New York. You repeat your message. You hold the phone away from your ear, correctly anticipating the barked command: “Buy!!!”
Your client later explains: “That was great! If we get information within 90 seconds of when it becomes public, we can make a killing. The value of the information then drops over time. After about 20 minutes, the information will be on the wire, and then its value falls way off. By forty minutes out, there’s no reason to act.”
But this was how an extraordinarily successful arbitrageur played the game in the late 1980s. This is a guy who told me: “I’m the only arbitrageur you’ll ever meet who’s certified clean. I used to work for Ivan Boesky, and I was there when the SEC came through. The Angel of Death has been through my house, and I’m an honest man.”
And this is the guy who called me on Tuesday, October 20, 1987 (the morning after Black Monday) to tell me: “I just wanted to let you know that we’re still in business. I thought you might be wondering.”
I’ll let the other old coots shake their heads in disbelief as they talk about how the pace of practicing law has accelerated, as mail gave way to Fed Ex, which gave way to facsimiles, which gave way to email, which gave way to instant messages, which will surely soon give way to telepathy.
But think about business: Having a window of 90 seconds within which to trade seems positively leisurely by contemporary standards. Today, high frequency traders move their computer systems to downtown New York, for fear that they’ll lose money during the millisecond it takes an electronic order to travel from, say, St. Louis, to Wall Street.
Remember what you’re doing today. Twenty-five years from now you’ll be shaking your head and thinking, “How quaint.”
Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at firstname.lastname@example.org.