The Root of All Evil

Robert Passarella has spent two decades at the top table of Wall Street, and is a veteran of JP Morgan, Meryll Lynch, Dow Jones and Bloomberg. Fanatical about the intersection of technology and finance, he’s an astute observer and history buff with a BBA in Finance from Baruch College and an MBA from Columbia Business School. Despite all of those things, he also happens to be funny as hell and whole-heartedly irascible.

Finance is dominated by those whose exploits—after all, a hedge fund is an organization formed to find something that will be illegal, and do it until it is. We figured Rob might know where some of the bones were buried, and point us at subversive case studies that could illustrate key ideas from the book.

He did not disappoint.

Rob’s pursuit of loopholes and hacks is more than just a natural curiosity—it’s a driving force that keeps him ahead of the curve. For example, in 2012 a chance meeting at a conference revealed a vulnerability in Twitter’s early API: a flaw in how the social platform was numbering messages meant that they could accurately estimate the platform’s user growth at a time that the company was only officially releasing quarterly.

“That’s the key. Exploiting loopholes by being inquisitive. And that’s happened throughout history. That’s how innovation happens. ‘Hey, I want to co-opt that system because it doesn’t do exactly what I need. If I co-opt it, I can get what I need out of it.’”

Rob opened our eyes to a case study that made it into our chapter on arbitrage, dating back to an early communications platform. Before Marconi’s wireless, before morse code, and almost 50 years before the electrical telegraph, there was Chappe’s optical telegraph.

In the late eighteenth century, the French constructed a series of towers within sight of one other, ranging from 5 to 20 miles apart and spanning the country. Each tower was equipped with a semaphore rig, which would be handled by an operator.

To send a message, an operator would position the arms of a pivoting structure top send characters by semaphore—a visual alphabet initially used to send messages between ships at sea. At nearby towers, operators used telescopes to read those messages before sending them onwards. This was dramatically faster than the then-fastest method of horse messengers, especially for long distance communications or short messages.

First used by the military—as is often the case with new technologies—it was quickly co-opted by Parisian brokers who paid the operators so they could get advanced knowledge of market prices.

“If you slipped some guy a few francs you could actually get a coded message to your broker down in Marseilles, who knew when the shipments were coming in. They developed a whole set of codes to basically hack the system and co-opted the entire semaphore network to do it.”

Hacking systems is second nature in cybersecurity, but the behavior is hardly confined to that industry. Rob talked about one bank (which he declined to name) and a hack that helped it find a similar time advantage:

“Early on in my career—I’d say back in the nineties—there was a group of technologists who were associated with trading in Japan. And one day a technician came in to take care of something. The Nikkei index at that time was in a box: a terminal that calculated their index, which was running numbers every day.

One of the technicians was fixing something, and he had to leave for lunch. He left a special diagnostic disc lying around. And one of the technologists, you know, made a copy of the diagnostic test and figured out that the actual computation for the Nikkei index was being done locally.

They realized you could get the individual components on the same feed and compute the index about 30 seconds ahead of what was being done (in the real world). From this they created a whole API to basically calculate the index and they started trading ahead of it, and they made a tremendous amount of money.

The trader who understood this did very well. In fact, he made something like $300 million worth of profit in Japan. The apocryphal part of the story is that he had to have a bulletproof vest in his office because the Yakuza was looking for him. Well, the Yakuza stuff, nobody knows, but we know for sure they did take the diagnostic disk. What they had uncovered was this incredible inefficiency. Why were they computing this locally when it should be done someplace else? That kind of stuff happened all the time in the nineties, because the technology was still new.”

Our interview with Rob pinballed from AI, to Renaissance forgeries of the Spear of Longinus, to Beanie babies, to Charlie and the Chocolate Factory, to the blocking of the Suez canal—and the subsequent borking of global ecommerce systems.

Giacono Casanova was born in 1725, in Italy. His autobiography is considered to be one of the most original histories of European norms, and an overview of society from that period. He hung out with Goethe, Mozart and Voltaire, and was familiar with royalty and the odd pope.

“To succeed, the thing is to be an omnivore when it comes to sucking up any information. There are so many places to find it. And all we need to do is look back, which is a lost art, the wanting to learn from history. There’s one story I love – about Casanova. Even as far back as the 18th century, he was able to see the variations in the price of gold in different places, and used that arbitrage to finance his womanizing across Europe. I mean, I love that.”

What we came to realize, with Rob’s inimitable assistance, is that while each hack or exploit stands alone, the underlying patterns remain. History doesn’t repeat—but it sure does rhyme.

Consider looking back to get ahead. Hacks might be unique, but the overarching theme is the same. The people who build effective, advantageous strategies are constantly looking for opportunity. They’re comfortable with being disagreeable, and swimming against the tide. They prowl the margins and are perennially curious. They know opportunity lurks in the gap between what’s expected and what’s possible.

We’ll let Rob have the last word, even if some of his mixed metaphors stick out like a sore tooth.

“Great investors find the nuggets, and know what threads to pull.”