From legendary short seller to god of American capital

Chapter 416 French lad Lyon goes on trial with the National Rope Company

Larry and Mr. K arrived at Reading's New York branch at 12:30 p.m.

The two got off the carriage. Rabbit and Tiger followed Larry and Mr. K into the sales office, while Dog guarded the carriage and stopped at the bottom of a balcony at the end of the street.

When Larry pushed open the door of the sales office, it was lunchtime. Several customers were sitting in front of the price list, talking animatedly, while a staff member in a sales office customer service uniform was explaining something to them.

The trading hall was bustling with activity, as a group of people gathered around a blackboard, watching a tall, thin young man draw a complex chart on it.

Larry ignored the idlers and stood up straight, searching for Baruch among the uniformed crowd, until he heard the tall, thin young man speaking loudly in somewhat slurred English, "Gentlemen, believe my prediction: the National Rope Company will inevitably fall, and it will be a precipitous fall."

Larry and Mr. K next to him were startled. They turned to look and saw the young man holding up his arm and drawing a circle on the blackboard, marking the coordinate axis of a chart and some incomprehensible, complicated formulas. He continued, "—The only thing that doesn't lie is mathematics, because mathematics doesn't lie. Through the curves I draw, I can accurately predict market movements."

A burst of somewhat impolite laughter erupted from the crowd.

Larry gave the young man a serious look. He was tall and thin, with a pale face, and his chestnut curly hair was messy like a bird's nest. His gray-blue eyes moved quickly behind his glasses as if he were reading an invisible formula.

The clothes were very outdated, but the shirt collar was snow-white, and there were three different colored pens and a brass slide rule in the coat pocket.

"It sounds like a French accent!" Mr. K muttered as he came up.

Larry nodded, then turned to attend to his own business, seeing the tall, thin young man still promoting his charts to the onlookers.

Larry grabbed a customer service representative from the sales department. "I'm looking for your front desk manager, Baruch!"

"Mr. Baruch? He's the acting general manager of the sales department now—please wait a moment, I'll go find him."

Larry nodded, walked to the price board, and searched for National Rope Company among the numerous stock quotes. He found it quickly; the company's initials were followed by a cursive "94.5," meaning that National Rope Company's last quote for the morning was $94.5.

"High-priced stocks—not bad! They'll sound really crisp when they fall," Larry muttered to himself.

"Boss, are you familiar with this company?" Mr. K asked, leaning closer.

"I'm not very familiar with it. This kind of stock is the kind I wouldn't touch when I was working at a brokerage or betting shop, because it has a clear controlling shareholder," Larry replied.

Mr. K fell silent, afraid of disturbing Larry's train of thought. But Larry wasn't satisfied with the morning's closing price on the quote board. He was about to call for the sales staff to fetch the paper strip about National Rope Company when he heard the tall, thin young man shout in French, "—This isn't gambling, it's a dance of probability, the difference being that only I know the formula for the steps. Look, according to my revised chart, National Rope Company will fall by more than 3% in the next two hours!"

Larry turned to look at the tall, thin man in the crowd again, then his gaze shifted to the chart on the blackboard—after a few seconds, Larry was suddenly surprised. It was a chart of the National Rope Company's stock price movement displayed on a numerical coordinate axis.

The vertical axis represents the stock price, and the horizontal axis represents time. However, he uses several curves to represent the stock price, which makes the chart appear more abstract.

The Frenchmen were still chattering away when an elderly man with a local accent suddenly shouted, "Shut up, Lyon! To hell with your derivatives! Do you know what you're saying?"

The Frenchman looked at the speaker, the chalk in his right hand pausing in mid-air. "Can you tell me where I went wrong?"

"Son, the market doesn't follow your French pasta-style formulas; it feeds on fear and greed—are those things in your notebook?"

"What we're saying doesn't contradict each other. What I'm pointing out is the true trend hidden behind the stock price—can't you see it? The stock price is lying, but mathematics doesn't lie. Sir, it's the people who wrote down those numbers who are lying."

"You simply don't understand. National Rope Company is one of the most stable blue-chip stocks. How could it possibly collapse?"

"Let me translate your current situation into another language, the language of mathematics—" The young Frenchman named Lyon began writing numbers rapidly on the blackboard with chalk, but the surrounding crowd was already getting impatient.

They gathered around after hearing the young man say that the stock price of the National Rope Company would fall, fully expecting him to have some inside information—but all he kept saying was to emphasize numbers and probabilities.

Before the Frenchman could finish writing, the old man who had just questioned him cursed and walked away. With him leading the way, the others gradually dispersed as well.

The Frenchman filled the blackboard with numbers, but when he turned around, he found that the crowd had dispersed. His face froze, but he did not show any disappointment. Instead, he turned to stare at the numbers on the blackboard, his lips moving silently, as if he were recalculating.

Larry walked over, smiling, and pointed to the complex formulas and curves. "Can you talk about your model?"

The Frenchman whirled around, a flicker of wariness in his grey-blue eyes, but seeing Larry's calm expression, he adjusted his glasses. "Do you understand math?"

"I don't understand, but I'd like to know what your judgment is based on? Is it probability or a function?" Larry replied with a smile.

"Yes, I am. I'm writing a paper on 'The Application of Probability Theory in Financial Time Series,' but my teacher says it's not my main research area," the Frenchman said, frowning.

"Your tutor is wrong. Probability is a very important subject in mathematics." Larry looked closely at the charts and suddenly shook his head.

He said, "However, your research also has problems. You shouldn't use mathematics to predict the price of the next moment—that's divination. You should use mathematics to measure risk. For example, how much will I lose if I'm wrong? The answer to that question is 1 times more important than 'how much will I earn.'"

The Frenchman was stunned. He turned to look at the formula on the blackboard and was momentarily bewildered.

Just then, Baruch rushed over from the office area. He spotted Larry immediately and called out, "Mr. Livingston! I'm here."

Larry turned to look at Baruch, a smile appearing on his face, and walked over to him in a few steps.

Their hands clasped tightly together, and Baruch's voice was tinged with laughter, "Mr. Livingston, when did you return to New York? If you have the chance, I'd like to treat you to a drink tonight!"

"Let's postpone the drinking. Now, help me check out a stock—come on, let's talk in your office."

Baruch nodded and led Larry toward the office area. Mr. K and the other two, having not received any explicit instruction from Larry, did not dare to follow and could only stand in the lobby.

Three minutes later, the young man named Lyon suddenly exclaimed in surprise, "—You're right, sir! I really did look in the wrong direction—sir?"

The Frenchman turned his head, but couldn't find the person who had just spoken to him.

In Baruch's office, Baruch had just helped Larry sit on the sofa when he picked up a large ledger, ready to report to Larry on the account's profit and loss for the year!

"No rush!" Larry waved his hand. "You need to check on the National Rope Company immediately. Go through all its trading volume, short position balance, and major block trades over the past month—the more detailed the better!"

Baruch's face stiffened slightly upon hearing "National Rope Company." "—You haven't heard anything, have you?"

Larry nodded. "I've heard some things!"

"But that Frenchman named Lyon, his words don't count," Baruch said, trying to be as polite as possible.

Larry understood that Baruch had misunderstood him, waved his hand, and said with a smile, "It has nothing to do with him—you go check it out first. I need all the information, the more detailed the better, preferably with historical price trends—"

"Okay, we'll get right on it!" Baruch nodded emphatically and strode out. After a few steps, he stopped. "—But Lyon has the historical trend chart of the National Rope Company you mentioned. Should I borrow it from him?"

"Fine—but I don't want to see him right now! Get him for me, Mr. Baruch, we need to hurry!"

"Okay! Please wait a moment!"

A minute later, Baruch handed Larry a stock chart of the rope company made by Lyon: five minutes later, all the available transaction information about the company was placed on the table in front of Larry.

"You'll need to wait a moment for the shareholder register and other documents; headquarters should be able to send them over in about an hour!" Baruch said apologetically.

"Oh, no blame on you—there aren't F10s these days!" Larry replied casually, his eyes glued to the documents, not even looking up.

What is F10?

Although Baruch had doubts, he didn't dare to ask.

Larry glanced at the documents, casually pulled a Parker gold pen from his coat pocket, and wrote a few words in the blank space:

Share capital, circulating shares, short position volume, counterparty position —

These words came from the heart. Larry knows that the most crucial thing now is how many shares of this stock are floating outside, how many are held by die-hard bulls, how many are pledged by banks, and how many can be borrowed to dump shares.

Short selling is not gambling, it's arithmetic!

Despite the commendable facts that have already been proven, short selling is inherently a high-risk, high-skill activity, and to act rashly—as Mr. Keane did—is suicidal!

We must not act rashly before we have a clear understanding of this intelligence.

It was 1:30 PM, and the afternoon trading session had already been open for half an hour.

Larry stood in front of the blinds, looking at the latest figure on the price list through the glass—$95 and a quarter.

The stock price of the National Rope Company continues to demonstrate the exceptional control exerted by major shareholders. The market not only didn't fall, but continued to rise.

Larry stared at the blackboard, while Baruch stood silently beside him, watching the stock price with him—to be honest, Baruch couldn't see anything unusual about the National Rope Company's stock price!

"Sell 1000 shares!" Larry suddenly said.

Baruch paused, took half a step forward, and asked, "Sell 1000 shares of National Rope Company at market price?"

"Yes!" Larry's answer was crisp and concise.

Baruch dared not ask any more questions and immediately ran out to find a trader to place an order.

On the third bid, National Rope's stock price suddenly plummeted from over $95 to around $93. However, the next bid pulled it back up to $95.

Larry stared calmly at the price chart, his face expressionless. Fifteen minutes later, "1 shares sold this time, market price!"

Baruch was startled, but being the most professional stockbroker, he didn't ask his client "why." Instead, he double-checked the quantity and underlying asset of the short position before running outside to find a trader to place the order.

Larry ignored everything around him, staring only at the price list outside the window.

This time, the stock price reacted much more sensitively than last time. Three minutes later, with the second offer, the National Rope Company's stock price plummeted by five points in one go.

The latest price written on the blackboard is $90 3/8, barely holding the $90 mark.

Larry raised his eyebrows and nodded slightly, clearly feeling that the latest stock price movement was exactly what he had expected.

Baruch, standing to the side, stared at Larry, not daring to disturb him. He was fully expecting Larry to issue another trading order, but to his surprise, after the two short orders were executed, Larry fell silent.

As the rope company's price gradually climbed back up to $95, Larry didn't say anything more.

Near the close of trading, with eight minutes to three o'clock, Larry suddenly turned to look at Baruch and issued his third trading order since arriving here.

"Help me close out all 1.1 shares of National Rope Company, liquidate! Limit price: $95."

Baruch's suspicions returned—Larry rushed over to place a sell order, and he assumed Larry was shorting the stock, but to his surprise, he wanted to close out his position at the end of the trading day.

Is he doing short-term trading? That doesn't make sense! If he were doing short-term trading, he should have closed his position just now. A 5% drop is already very profitable for short-term traders!

Larry actually waited until the stock price pulled back above his cost price before closing his position. That's not short-term trading; it's cutting his losses!

But Baruch still checked the trading instructions and placed the order. After telling the trader the instructions, he didn't turn around and go back to his office, but instead waited at the trading desk for a response.

Because time was extremely tight—with only a little over five minutes left before the market closed—Baruch doubted that his largest client's liquidation order would be executed.

Sure enough, at 3:05, the trader received a call and solemnly told Baruch, "Mr. Manager—Mr. Livingston's order to close out 11,000 shares was not executed—this is not because our order was not executed quickly enough, but because our order entered the market at 2:57, but there was a large order at $95.5, and Mr. Livingston's limit price could not be reached at all."

Baruch frowned slightly, turned, and went back to his office. As he opened the door, Larry turned his head sharply, staring intently at him.

"Mr. Livingston, the last closing price for National Rope Company was $95.5 —" Baruch said apologetically.

"I know, I've already seen it on the price list!" Larry interjected.

"However, your order was not executed after it was placed—because your limit price was $95, and there were a lot of long orders at $95.5, so your 1.1 shares did not get a counterparty."

Baruch tried to control his speaking speed so that Larry could hear every detail, lest the major client blame the sales department for the failed transaction.

To everyone's surprise, Larry didn't frown when he heard the news; instead, he smiled and his expression relaxed.

"Oh, very good! That's excellent. Thank you for your hard work, Mr. Baruch."

As Larry spoke, he actually took a few steps back, sat on the sofa, crossed his legs, and picked up the stock chart of the French company Lyon to look at.

Baruch was dumbfounded. For the first time, he felt that he couldn't keep up with his client's train of thought at all. Looking at Larry with his legs crossed, unfolding the charts, he felt that Larry's actions throughout the afternoon were incomprehensible.

Larry, a smile on his face, glanced at the charts, then, as if suddenly remembering something, turned to Baruch and said, "Mr. Baruch, please urge headquarters—I need to know the shareholding situation of those within the National Rope Company—"

"Oh, okay!" Baruch didn't dare ask any more questions and turned to leave.

"Hey, wait a minute!" Larry suddenly called out to him, "That Frenchman, Lyon, right? Do you know him?"

"Oh, he was a dropout from École Polytechnique in Paris—he came to New York to stay with the general manager, but unfortunately, the general manager has passed away. The general manager's wife asked me to arrange a job for her in the sales department, but he—as you can see, he's not doing his job properly!"

"I see!" Larry smiled, thought for a few seconds, and said, "Let him in. I have something I want to say to him."

"Yes, Mr. Livingston!" Baruch turned around again—

"Wait a minute!" Larry interrupted again, his eyes filled with apology as he looked at Baruch. "Mr. Baruch, if I wanted him to come with me—to steal him away from me—would you be willing?"

Baruch was stunned again. After thinking for two seconds, he exclaimed, "I couldn't ask for more!"