A $50 million margin call? I'll short Wall Street.

Lu Ze's gaze returned to the screen that displayed foreign exchange rates.

While the world’s attention has been focused on his statement, Sarkozy’s outburst, and the series of bombings at European banks over the past week, another earthquake is quietly unfolding on this screen.

An earthquake that only a very few people can understand.

The screen displays the price charts of three cross-currency pairs side-by-side:

New Zealand dollar to Japanese yen (NZD/JPY).

British pound to Japanese yen (GBP/JPY).

Australian dollar to Japanese yen (AUD/JPY).

All three curves have shown the same direction over the past week—downward. And it's a steep downward movement, which is extremely rare in the foreign exchange market.

The foreign exchange market is the most liquid and largest market on the planet.

The daily trading volume in the global foreign exchange market is an astronomical figure of trillions of dollars, enough to make the power of any single player seem insignificant.

Here, it's almost impossible to "manipulate" the market like you would with a small-cap stock, nor is it possible to influence the exchange rate of a major currency with billions of dollars.

But this figure of "trillions" is the sum of all currency pairs in the entire market.

Specifically, for a particular cross-currency pair—such as the New Zealand dollar against the Japanese yen—its liquidity is much thinner. And this is precisely the battlefield that Lu Ze chose.

What he did was one of the most classic, and soon to be the most deadly, trades in the world: short selling arbitrage.

In the global bull market of the past few years, with its abundant liquidity, arbitrage trading has been a money-printing machine for countless hedge funds and Japanese retail investors (those housewives known as "Mrs. Watanabe").

The logic is simple: borrow currencies with extremely low interest rates (such as the Japanese yen, which has an almost zero interest rate), then exchange them for currencies with higher interest rates (such as the Australian dollar or the New Zealand dollar), profiting from the interest rate differential. As long as the exchange rate remains stable, this is a sure-fire way to make money.

Over the past few years, this machine has been running extremely smoothly. Massive amounts of money have been borrowed in Japanese yen and flowed into high-interest currencies such as the Australian dollar, New Zealand dollar, and British pound, pushing their exchange rates ever higher.

But now this machine is operating in both directions and will kill anyone still riding on it in an extremely violent way.

When the global financial crisis fully erupted and the market fell into extreme panic, deleveraging and risk aversion became the only themes.

All funds borrowed in yen for speculation will be liquidated in a frenzy. They will sell their Australian dollars, New Zealand dollars, and British pounds to buy back yen to repay their debts.

Once this process begins, it creates a fatal positive feedback loop: arbitrage trades close out → sell high-yield currencies and buy yen → high-yield currencies plummet and yen surges → the sharp fluctuations in exchange rates trigger stop-loss orders to close out more arbitrage trades → more selling and buying...

This is in principle identical to the negative Gamma spiral in the commodity market during "Fuse Day".

This time, however, the battlefield is foreign exchange.

Lu Ze's positions were mainly established through Goldman Sachs' trading channels.

But even through Goldman Sachs, establishing such a position is by no means easy.

You can't just dump hundreds of billions of dollars in short positions on a cross-currency pair all at once—that would instantly break through the order book, expose your intentions, expose you to huge impact costs, and even alert the enemy.

In real forex trading, the scenarios depicted in novels and movies, such as "opening/closing positions with a single click for hundreds of billions or trillions of dollars," are virtually impossible to achieve.

The actual operation requires extreme precision and patience.

Taking the Australian dollar against the Japanese yen as an example, the trading team doesn't directly establish a large position on this cross pair. Instead, they break down the trade and complete it indirectly through two of the most liquid major currency pairs:

Australian Dollar to Japanese Yen (AUD/JPY) = Australian Dollar to US Dollar (AUD/USD) × US Dollar to Japanese Yen (USD/JPY).

By shorting the Australian dollar on the most liquid AUD/USD pair and simultaneously going long on the Japanese yen on USD/JPY, one can effectively create a "short AUD/JPY" position without leaving an overly obvious mark on the thinner cross pair.

This dismantling, coupled with the extremely decentralized operation through multiple brokerage channels, made Yuanxing's position building process as seamless and silent as mercury flowing across the ground.

Lu Ze's biggest advantage is time.

Two weeks earlier, while everyone was still debating Lehman Brothers' bankruptcy and bailout plan, Lu Ze had already begun quietly and gradually building up these short positions.

Two weeks is enough time for him to calmly and quietly build up his position.

To date, Yuanxing has invested approximately two to three billion US dollars in these cross-trades. Through five times leverage, the nominal exposure has reached over ten billion US dollars.

A nominal exposure of over ten billion US dollars. In a foreign exchange market worth trillions, this is still a small ripple. But if you bet on the right direction, amplified by leverage, it can bring astonishing returns.

Now, the numbers on the screen tell him he's bet on the right direction.

In the past week alone, these cross-currency pairs have fallen by about five percent.

For other instruments, five percent may not seem like much. But in the foreign exchange market, especially on these cross-currency pairs, a five percent one-sided fluctuation within a week is astonishing, almost seismic.

With a leverage ratio of 5, this week's 5% has turned into a paper profit of 25%.

With an initial investment of two or three billion, the company made a profit of seven or eight hundred million within a week.

This is just the beginning.

Lu Ze's gaze lingered on the three downward curves.

The real waterfall is yet to come.

He clearly remembers that after entering October, as the global financial crisis entered its most severe phase, and as deleveraging and risk aversion reached their peak, the wave of liquidation of these arbitrage trades would turn into a complete stampede.

The New Zealand dollar and the Australian dollar will experience a waterfall-like, precipitous drop against the Japanese yen in October.

The magnitude and speed of the drop will be recorded in the history of foreign exchange trading.

The Japanese yen will appreciate violently due to the massive influx of safe-haven funds.

He remembers the sheer magnitude of the volatility—on certain trading days, the daily swings of these cross-currency pairs would reach astonishing levels, forcing countless leveraged traders to liquidate their positions within hours, leaving them with nothing.

October will be the graveyard for arbitrage traders.

He had already prepared body bags for them.

Even so, even though he knew clearly what the future would look like, and knew that the waterfall was almost a certainty, Lu Ze did not choose to increase the leverage.

Five times. This was the upper limit he set after careful calculation.

He could certainly leverage ten or even twenty times (which is not uncommon in forex trading). If he did do that, the impending crash would theoretically bring him much, much higher profits.

However, the problem is that the foreign exchange market, especially during a crisis, is so volatile and unpredictable that no model can fully predict it.

The general direction of history is certain. But every moment in history is filled with random noise.

Leverage is a double-edged sword. While it amplifies returns, it also amplifies your vulnerability to random noise.

If he leverages twenty times, then just one unexpected 5% reversal could wipe out his entire position and force him to liquidate.

By then, no matter how accurate his prediction of the final outcome was, he would be out of the game and could only watch helplessly as his own downfall finally arrived after he went bankrupt.

Lu Ze shook his head and switched the market data to other currencies with higher trading volume, such as the US dollar and the euro.

The newly received funds, and even the funds that will soon be managed for his fund investors, will certainly continue to be used to build positions. However, the liquidity of those currency pairs with the "largest declines" will dry up to the point that it will be difficult to establish huge positions.