Paradise Bought

Les Fleurs du terminal
by Katie Kitamura

The following essay was read aloud by the author as part of Paradise Bought, which celebrated the publication of Headless, a murder-mystery by the elusive author K. D., and reflected on the relationship between offshore finance, human sacrifice, the mystery genre, and the free rein of capital.

Almost fifteen years ago, I received a phone call from a man who identified himself as the CEO of Bloomberg, the financial-information company. He asked me to come in for a meeting, the purpose of which he didn’t specify. I agreed, and we set a date for the following week.

When I arrived at Bloomberg’s London offices, on Finsbury Square, I saw that the interior had been colonized by artworks. Amid hundreds of televisions screens and terminals, there was a Morse-code chandelier by Cerith Wyn Evans, a neon sign by Tracey Emin, and a large public gallery called Bloomberg Space.

I was shown to a large office, and during the hour-long meeting, the CEO invited me to generate ideas for the company. There was no remit beyond that. These ideas could take the form of office interventions, artist commissions—anything that might stimulate the army of employees housed in the company’s hulking building. I was told that my ideas required no definite output but also that there was no limit to the resources that could be put behind a project.

The proposal was so absurd it was irresistible. Over the course of a year, I duly generated a number of ideas. Among the more successful was an architect-designed children’s playground, an idea that gained enough traction to result in a meeting with the director of Zaha Hadid’s studio (but not with Hadid herself), as well as one with a property developer who owned the lease on Finsbury Square and who tried to persuade us to build a sports/retail/entertainment complex instead.

My least successful idea was a collaboration with a conceptual perfumer, a close friend. She had created a number of frankly extraordinary perfumes: a chocolate that, once eaten, would release scent through the skin of the consumer. A capsule that, when broken under the nose, would temporarily suspend the wearer’s ability to smell. A perfume that smelled like dust and oil; a hypoallergenic rooftop garden in Dubai.

Our idea was to create a highly customized perfume for Bloomberg, the composition of which would change in response to movements in the stock market. Individual notes would be assigned to the thirty companies listed in the Dow Jones Industrial Average, the strength of each in the overall composition of the perfume growing or receding in sync with the company’s performance. Each day, our perfume machine would generate a fresh bottle of perfume, a daily snapshot of the Dow Jones and the market at large.

Literal assignments could be made—the scent of oil for Exxon, corn syrup for Coca-Cola. It was, we reasoned, the perfect product for Bloomberg, whose terminals give customers up-to-date financial news. Each bottle would be stamped with a numerical representation of the date—for example, 17.02.03 or 27.04.04. I thought these numbers could also function as the title of the perfume, but my friend was in favor of the rather more blunt MONEY. It would, of course, be extremely expensive to produce, but in those prerecession days, the resources of the corporate sector appeared infinite, and I had been encouraged to think big.

As you will have guessed, the perfume never came to fruition. Apart from the clear logistical problems—we weren’t in fact sure such a thing was possible to manufacture—there were concerns that the project didn’t put out the right message. Although it would have been designated for internal consumption, what if the project was leaked or in some way became public? A bespoke perfume called MONEY? I was politely encouraged to try another direction.

This took place long before I thought of becoming a writer. But the proposal for this perfume contains some of the reasons why Headless is so intriguing to me as a writer of fiction. The idea of setting certain parameters and then allowing the resulting conditions to generate the content. The notion of authorship being located in the identification of a system, rather than in the micromanaging of content.

More than anything, Headless embodies the fantasy of capital as a machine generating fictions—almost a version of Stanislaw Lem’s planet Solaris. One of the great distinctions of Headless is that it converts fictions into narratives through the use of genre devices. Device is, I think, the right word—Headless is a Frankenstein’s monster, composed of autonomous parts. The crisis of authorship that this novel represents is in some ways the hope that every novelist has: that the text will commence to do things, independent of your intention; that the moribund creation will begin to breathe with real life.

Beyond the Beyond
by Mary Poovey

The following essay was read aloud by the author as part of Paradise Bought, which celebrated the publication of Headless, a murder-mystery by the elusive author K. D., and reflected on the relationship between offshore finance, human sacrifice, the mystery genre, and the free rein of capital.

As befits a project whose octopus-like tentacles extend in many directions, I take my quotations not from the Triple Canopy edition of Headless but from an earlier instantiation published by the Power Plant and entitled Goldin+Senneby: Headless. My first quotation takes the form of a question posed by the curator Kim Einarsson to Angus Cameron, who is an emissary for Goldin+Senneby, as well as a character in Headless: “Why do you think Goldin+Senneby want to connect the project to Georges Bataille and his secret society? Why link Headless Ltd. to Acephale?” My second quotation appears in a section authored by Hinrich Sachs, a Swiss artist. He describes the process and content of Headless as follows: “The powerful story gradually takes shape: It is the story of the fiction of money and of money’s extraordinary ability to create reality, the story of how global electronic markets make power out of placelessness, and how, as participants, people and bodies are made docile.”

In these brief remarks, I want to offer an answer to the first quotation and a meditation, of sorts, on the second. The reason G+S imply that Headless Ltd. is a reincarnation of Bataille’s secret society, I suggest, is that one of the critical ideas of Acephale was what Nietzsche called the “eternal return.” The eternal return invokes both sheer contingency and a past that has never been present. This “past that has never been present,” but that haunts the present as its imaginable alternative, is virtual. It takes its value, as a space for imagination, from its relation to what actually happens, the real; but it also gives the real value, for only by imagining what might have happened can one truly appreciate what has, indeed, happened. Only by truly embracing contingency can one be prepared for anything, some part of which will become the event.

This tension, between the virtual and the real, or contingency and the event, is central to the entire aesthetic project of Goldin+Senneby. In the Headless project, it takes the form of a tension between the narrative logic of the generic murder mystery and the operations of chance that unfold when the artists outsource the execution of their work. The tension between what Nietzsche would have called the will to power and contingency (or “the will to chance”) is the Headless project, as it is performed in spaces like the one we occupy now.

The more-or-less explicit subject of Headless the novel is, as my second quotation states, an interrogation of the kind of financial institution that capitalizes on the virtuality inherent in modern forms of money: the offshore International Business Corporation. The purpose of this institution is to shelter assets from scrutiny to protect them from taxation. As we learn in Headless the novel, the guarantee of the IBC is simple: “tax-free trading. 100% anonymity. No public register of shareholders or directors.” The IBC, in other words, converts profits into “loss,” as far as the tax inspector is concerned. Of course, the loss is virtual, and, for the company’s owner, what’s real (not virtual) are the profits.

As powerful as the institution of the IBC is, however, some financial instruments also exploit virtuality—and with an even greater impact on the global economy. Most powerful of all are financial derivatives and the derivatives market where they’re traded. The purpose of derivatives is to capitalize on movements of prices and relationships, as they unfold in time. If the IBC was created to convert profit into loss, then derivatives are vehicles designed to convert virtuality or contingency into profit. As such, they provide a perfect riff on the entire Headless project, for they, too, are genre-defying performances, which take advantage of—indeed, expose—the market as something that takes place not in chronological but in virtual time. Derivatives expose the interdependence of the virtual and the real.

As vehicles for hedging, derivatives are very old. Their first incarnation was probably some Greek farmer’s desire to protect against the possibility that his crop would not yield what he anticipated at the moment of harvest. (Aristotle refers to derivatives in the Politics.) But the derivatives market is an event with an identifiable and very recent origin: It sprang into existence, almost overnight, in the wake of the publication, in 1973, of an article that provided a theoretical model for pricing derivatives. The article described what is now known as the Black-Scholes-Merton pricing model, and this sparked a revolution in modern finance.

As their name suggests, derivatives derive their value from some other asset—in the world of finance, this is basically a stock or bond, called the underlying. Initially, the price of the derivative is fixed by contract, as a function of the value of the underlying and the passage of a particular period—the time to maturity, or expiration, of the derivative contract. In the example of the farmer, he buys a contract, called a future, that obliges him to sell his grain at a specified price at some fixed future date—say, one hundred dollars a bushel in September, when the harvest comes in; what the farmer gets in exchange is an assurance that he will receive a definite amount of money no matter what happens to the crop’s price. For his part, the investor who creates and sells the contract assumes the risk that the price of corn will fall before the harvest. If the price does not change significantly between the time the contract is made and its due date, the farmer loses only the fee he paid for the future, and the investor receives only this fee. If the price of the crop falls, the farmer receives the specified price, and the investor loses money. If the price rises, the farmer still receives the price to which he originally agreed, but the investor makes a lot of money.

The challenge in any such contract is to figure out what value to assign the derivative. Such valuation is difficult both because the value of the underlying changes over time and because the probability distribution in which this change occurs cannot be known for sure. In their 1973 article, Fischer Black and Myron Scholes argued that the price of the asset used as the underlying follows what is called geometric Brownian motion. This means that, over time, the price of the security moves in random, but statistically predictable, ways: There will always be a certain drift to the price, but the points in this drift are scattered around a deterministic pattern. Mathematically, the coefficient of the drift reveals the volatility of the underlying share, but, if the volatility is sufficiently large, on a given day, the security can trade at a lower price, even if the overall drift is positive. This is why I say the probability distribution of the value of the underlying cannot be known for certain or in advance. (This is a point Black and Scholes did not explore because they were interested only in valuing derivatives in an ideal, theoretical space.) The value of the derivative, in turn, which is a function of the underlying, depends on two factors: the length of time to expiration and the price of the underlying immediately prior to the expiration date. There is a mathematical device called Ito’s lemma that expresses the differential of a function that depends on a stochastic variable governed by Brownian motion. Thus, Black and Scholes, with the help of Robert Merton, used Ito’s lemma to create a theoretical tool that could calculate the value the derivative should have—if the underlying follows Brownian motion with a drift and if the expiration date is known.

The next step in the Black-Scholes argument concerns how to create a portfolio of securities that always grows at the riskless interest rate (conventionally, the rate of the US-government Treasury bill). Such a portfolio would give the investor maximum returns for minimum risk. To create such a portfolio, the investor has to hedge the items it contains by balancing them against one another. To do this, he has to continuously rebalance the amount of shares the portfolio contains against the derivatives instruments by buying and selling the underlying shares. This is called a dynamic replication strategy, and it is made possible by the virtual or contingent nature of the derivative—as a relationship between a definite price and another price that depends on this price subject to the vagaries of chance. In theory, using dynamic replication allows the investor to manage risk and guarantees returns for the portfolio that are at least equal to the riskless interest rate.

In practice, however, something quite different has occurred. Once traders realized they could use a theoretical formula (the Black-Scholes-Merton model) to evaluate derivatives, they began doing so, every day, on the exchange that opened in 1973—the Chicago Board Options Exchange. Traders, in other words, began to actively monitor the value of derivatives and trade the underlying securities in a ratio equal to the partial derivative of the derivative value with respect to the underlying security’s price. Of course, as they traded, the prices of the securities changed because the ratio of supply and demand changed for each security. The resulting market—the derivatives market—now allows traders to price and exchange not simply the underlying securities but derivatives themselves: In the derivatives market, derivatives have become the underlying securities for other derivatives. And because the derivative-valuation algorithm instructs traders to constantly rebalance the hedges that protect portfolios by trading the underlying assets, the manufactured price of the derivatives leads to but also follows from the volatility of the underlying. This has led both to jumps in prices that far exceed the probability distribution typically associated with the Brownian motion of drift and to the creation of ever more exotic derivatives to hedge the underlying derivative-securities. These new generations of derivatives—barrier options, variance swaps, forward-starting options, and so on—have emerged when new instruments have been needed to hedge the underlying assets, which, as derivatives, were already hedged (as well as valued) in relation to something else.

In May 2012, Paul Wilmott, an applied mathematician at Oxford, estimated the notional value of the worldwide derivatives market to be 1.2 quadrillion (thousand trillion) dollars. That’s twenty times the size of the global economy, as measured by the combined GDPs of every nation in the world. The derivatives market is not only enormous. It is unregulated, it exists outside national legal regimes, it’s complex, and its dynamics are characterized by positive and negative feedback loops, which vastly increase both volatility and the interconnection of the institutions and investors involved in the market. Transactions in the derivatives market are also increasingly driven by worrisome trading strategies like high-speed, high-frequency trading and spoofing, a maneuver by which traders place large numbers of orders intended to be canceled before they are filled. High-frequency strategies take advantage of the fragmentation of trading systems to make profits merely on timing and speed. They allow traders with access to powerful computers, complex algorithms, and short-term price information to exploit tiny price discrepancies in the dispersed network of trading venues that compose “the market.” Spoofing is thought to have caused the so-called flash crash of 2010, in which the Dow Jones Industrial Average lost almost a thousand points in a matter of minutes, only to gain much of this back just as quickly.

You will already have seen resemblances between the shady world of offshore business corporations and the murky world of the derivatives market. Both lie outside the domain of national laws, allow wealthy individuals to shelter and increase their wealth in ways not available to the worse-off, trouble the boundaries between secrecy and disclosure and between private and public, and have taken on lives of their own. Unlike offshore tax havens, however, the derivatives market has no geographic location: Its “space” consists of interactions among traders, theoretical constructs, algorithms, software, trading venues, and flickering images on digital screens around the world. It’s difficult to see how an author could set a murder mystery in the derivatives market or how performance artists—even ones as clever as Goldin+Senneby—could outsource their creative will to other participants in this market. In a very real sense, the combination of theoretical ideas, like geometric Brownian motion, and instrumental capacities, like dynamic replication, along with the trading strategies I’ve just named, have already created an unrivaled example of outsourcing. It’s just that what’s being outsourced in the derivatives market is not some interesting concept, as Goldin+Senneby have launched with the Headless project, but responsibility for overseeing the stability of the global economic system itself. This is much more frightening than a simple murder, or even the possibility that Goldin+Senneby may be manipulating us.

A recording of a conversation about the relationship between offshore finance, human sacrifice, and the mystery genre on May 13, 2015.