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Is there spoofing and manipulation in crypto markets?

Crypto bots.

Is spoofing illegal? Well, sure, yes. There is a law against spoofing in U.S. commodity markets. In U.S. equities markets, where there is no explicit law against spoofing, it is still punished as a variety of fraud. Submitting orders to buy a stock, without intending to buy that stock, in order to push up the price so you can sell it: It sounds dishonest, and there’s no particular problem with calling it fraud.

But outside of electronic securities and commodities markets, things are a little murkier. A bond investor who gives a dealer the impression he might want to buy some bonds, asks for a two-sided market, and then sells the bonds to the dealer might just be a savvy trader, not a fraudster. Big activist shareholders of public companies sometimes offer to buy those companies, not because they really want to, but to put the companies in play so they can sell to a higher bidder. More broadly, creating an impression of demand for a product so that you can sell more of it is just fine in many businesses. Fashion brands pay influencers to wear their products so they can sell more of them. A mayo company bought some of its own mayo so that stores would order more of it; this was controversial but not obviously illegal.

There is I think no general rule to the effect of “you can’t create the impression of demand for something in order to sell more of it.” Sometimes you can, and sometimes you can’t.

This doesn’t make anti-spoofing rules wrong. They are arguably — probably — a good way to regulate certain kinds of markets, a way to make stock markets more efficient and informative, and it’s good to enforce them. But plenty of very smart people take the other side of that argument and say that markets would actually be fairer and more efficient if spoofing were allowed. The basic point is that a ban on spoofing isn’t a self-evident necessity of moral life, like a ban on murder; it’s a regulatory choice about how to structure markets. That choice could have gone the other way — and has gone the other way, in other markets and other countries and other times — and it turns on our economic views of what structure is more efficient, not on our moral views of how to live in society.

Here is a story about spoofing and manipulation in crypto markets. The manipulation is pretty lurid, and the general tone of the article is that “abusive trading practices are slowing cryptocurrencies’ adoption,” and that “it isn’t clear that this Wild West environment will last much longer” as regulators get more involved. But you could go the other way, like this guy does:

Kjetil Eilertsen, a Norwegian who started trading bitcoin in 2011, created a program called Quatloo Trader that he has touted as “the best market-manipulation tool in the world of crypto.”

Mr. Eilertsen says it is futile to ban manipulation in digital currencies. A better approach, he said, is to level the playing field by giving sophisticated manipulation tools to small traders.

“If everybody can manipulate, then nobody is manipulating,” he said in an interview. “You can’t ban anything from people who are dedicated to doing something.”

Well, it sounds pretty silly when you say it out loud. But it is an imaginable approach to markets, and one that is congenial to some people: libertarians, people who think they can outwit everyone else, people who enjoy the thrill of that particular game, etc. Of course it makes sense that the sorts of people — securities and commodities regulators, prosecutors — who regulate electronic markets for securities and commodities would step in to regulate the electronic markets for cryptocurrencies, and that they would pursue similar sorts of regulations for similar purposes. And the basic efficiency argument — that “abusive trading practices are slowing cryptocurrencies’ adoption,” and that getting rid of them would make crypto more useful — does seem pretty compelling.

Still. I once wrote:

Watching cryptocurrency create an alternate financial history, one in which some of those choices go another way, in which the balance is struck (say) in favor of more fraud and more innovation, or more democracy and less professionalization, or whatever, is the real appeal of the cryptocurrency revolution. If, after learning all of its lessons, it just converges entirely on old-fashioned finance — but with a different set of powerful incumbent billionaires — then what was the point?

What if our reaction to finding out that crypto markets are full of manipulation was not to crack down on the manipulation, but to be like “well that’s interesting, let’s see how that plays out”? Obviously a lot of people would get defrauded! (I suppose you could give them a broad background warning of “hey crypto markets are full of manipulation, keep an eye out,” though I’m not sure that would be very helpful.) But it seems to me that crypto is appealing as a laboratory for weird experiments in market structure, since the whole market is a weird experiment.

Trump taxes.

I can’t say I’m surprised that Donald Trump got orders of magnitude more money from his father than he has claimed to, or that he minimized taxes on that money through an assortment of legal, semi-legal and illegal means, but it is impressive that the New York Times has him so comprehensively dead to rights. And I am a bit surprised by the variety and brazenness of the tax machinations. For instance:

The most overt fraud was All County Building Supply & Maintenance, a company formed by the Trump family in 1992. All County’s ostensible purpose was to be the purchasing agent for Fred Trump’s buildings, buying everything from boilers to cleaning supplies. It did no such thing, records and interviews show. Instead All County siphoned millions of dollars from Fred Trump’s empire by simply marking up purchases already made by his employees. Those millions, effectively untaxed gifts, then flowed to All County’s owners — Donald Trump, his siblings and a cousin. Fred Trump then used the padded All County receipts to justify bigger rent increases for thousands of tenants.

On the one hand, as a connoisseur of that large and disputed territory encompassing “cleverly structured transactions” and also “clever fraud,” I am a little impressed. This is kind of clever! It is two scams at once: By transforming the gift into a business expense, you both avoid gift taxes and justify raising rents for rent-stabilized tenants. It really uses every part of the sham purchasing company. On the other hand, it’s not that clever. There is a bit of an unregulated-emerging-markets feel to it; interposing wealthy friends and family as middlemen, giving them large cuts of the business as unjustified markups, and then passing the costs on to the much less wealthy general public, is all out of a fairly standard playbook of corruption. It’s an interesting application of a very old theme. (Also: It’s bad.)

You sometimes see the argument that a culture of impunity for white-collar crime is somehow a causal explanation of the Trump presidency. I am not sure I fully agree with that argument, or even really understand it, for a variety of reasons not worth getting into here. But what about the reverse argument? The Justice Department, even today, prosecutes people for a wide variety of frauds and tax dodges whose common element is that they are less bad than the frauds and tax dodges committed by the president. If you go to prison for, like, spoofing on commodities markets, you might fairly complain that at least you didn’t set up a sham corporation to evade millions of dollars of taxes on your father’s estate while also inflating the rents of rent-stabilized tenants. That’s much worse! But if you’d done that, you might be in the White House instead of prison.

On the other hand.

What about this, from that same Times article?

During the 1980s, Donald Trump became notorious for leaking word that he was taking positions in stocks, hinting of a possible takeover, and then either selling on the run-up or trying to extract lucrative concessions from the target company to make him go away. It was a form of stock manipulation with an unsavory label: “greenmailing.” The Times unearthed evidence that Mr. Trump enlisted his father as his greenmailing wingman.

On Jan. 26, 1989, Fred Trump bought 8,600 shares of Time Inc. for $934,854, his tax returns show. Seven days later, Dan Dorfman, a financial columnist known to be chatty with Donald Trump, broke the news that the younger Trump had “taken a sizable stake” in Time. Sure enough, Time’s shares jumped, allowing Fred Trump to make a $41,614 profit in two weeks.

Later that year, Fred Trump bought $5 million worth of American Airlines stock. Based on the share price — $81.74 — it appears he made the purchase shortly before Mr. Dorfman reported that Donald Trump was taking a stake in the company. Within weeks, the stock was over $100 a share. Had Fred Trump sold then, he would have made a quick $1.3 million. But he didn’t, and the stock sank amid skepticism about his son’s history of hyped takeover attempts that fizzled. Fred Trump sold his shares for a $1.7 million loss in January 1990. A week later, Mr. Dorfman reported that Donald Trump had sold, too.

There are two things here. One is the claim that Donald Trump would pretend to plan to take over companies without actually planning to do so. Some forms of this would be illegal manipulation — as Elon Musk found out last week! — but, when you’re not as blatant as Musk, they’re hard to prove. How can you know that Trump wasn’t contemplating a takeover? Sure if he announced “I am going to do a takeover of Time Inc., funding secured” and then it never went anywhere and he had no funding, that would be manipulation, but there are ever-so-slightly subtler ways to do that (“I just bought a big stake in Time Inc. and am considering the possibility of strategic transactions,” etc.) that are probably qualified enough to be fine. Trading on your own reputation — buying stock, announcing that you’ve bought it, watching it go up solely due to expectations about your involvement, and then selling it quietly at a profit — is, normally, entirely legal. It’s just that it shouldn’t work very well for very long: If you do this a couple of times with no takeovers, why would the stock go up on your next announcement?

The other thing is the claim that Fred Trump traded in advance of news that Donald Trump was buying stock. Is that insider trading? No, come on! Donald Trump was an outsider at Time and American Airlines, and Fred Trump was an outsider, and the only information that they (apparently) shared is that Donald Trump was buying the stock, and that information is fine. If you call up your father and say “hey dad I am thinking of buying Microsoft stock, it seems like a good investment, you should too,” and he does, and neither of you is a Microsoft employee or investment banker or whatever, then you don’t both go to prison. Come on. People are allowed to talk about their stock trades with their family members. If their own trades are material to the stock, then that is interesting, but not illegal. Insider trading is not about fairness (did Fred Trump know about Donald Trump’s trades before they were public?); it’s about theft (did Fred Trump get that information from Donald Trump with Donald’s permission?). This is not legal advice, of course, and there is an important exception for tender offers, and perhaps it is so obvious that I didn’t need to write it, but it comes up a lot.

Are shareholder meetings a farce?

Yes, shareholder meetings are a farce, of course. But I don’t really get this argument:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the number of U.S. publicly traded companies is dwindling in part because of excessive litigation and “frivolous shareholder meetings.”

“I love my shareholders. I speak to them in various forms all the time,” Dimon said Tuesday at the American Enterprise Institute in Washington. “But the shareholder meeting has become a farce. That’s what it is, we all know that.”

We do all know that! We knew that decades ago. But it has always just been the deal. The deal is that you get access to unlimited amounts of capital by being able to sell your stock to the general public, and in exchange you have to spend an hour a year sitting on a dais as the crankiest members of that public complain at you. It is a fairly simple economic tradeoff, a lower cost of capital in exchange for listening to a handful of weird rambling speeches once a year.

Of course there’s no law saying that you have to like that tradeoff, and Dimon is entitled to be cranky himself and complain about listening to the speeches. But that’s not all that’s going on here; he is also probably right that some companies now are evaluating that tradeoff and deciding it’s not worth it. The power dynamic in capital markets has shifted, and companies can now raise a lot of money with a pretty low cost of capital without tapping the public markets and their complement of long-winded cranks. If you can raise almost as much money almost as cheaply in the private markets, without the speeches, then you might do it.

But it is a weirdly revealing claim. The traditional argument is along the lines of “going public gets us cheaper capital but at the expense of shareholder pressure to pursue short-term profits instead of long-term results, increased litigation, managerial distraction, etc. etc. etc.” Those are all tradeoffs for the company: The company — and ultimately its shareholders — gets the benefit of cheaper capital, but at the cost of real economic tradeoffs, and its managers might reasonably decide, as fiduciaries for shareholders, that the cheaper capital isn’t worth it.

But “the shareholder meeting has become a farce,” who cares? It’s an hour of embarrassment for managers. The economic harm to the company is trivial or zero. The suggestion here is that corporate managers are willing to give up a cheaper cost of capital for the company in exchange for marginally greater comfort for themselves. If you are a startup founder working 120 hours a week to build your company, and you worry that accessing public markets will imperil your long-term vision and so you prefer to tap private capital instead, fine, whatever. But if farcical shareholder meetings are anywhere near the top of your list of worries about public markets, you can just deal with it, you know? If you can work through the night for your shareholders, surely you can listen to them whine for a little while.

Blockchain blockchain blockchain.

Blockchain:

A solution to providing frictionless trade across the Irish border after Britain leaves the European Union might be found using technology such as Blockchain, finance minister Phillip Hammond said on Monday.

“There is technology becoming available (…) I don’t claim to be an expert on it but the most obvious technology is blockchain,” Hammond said when asked about how the government could achieve smooth trade after Brexit.

Blockchain!

Also: “CoinDesk Ranks the Top 10 US Blockchain Universities and Colleges.” Blockchain!

MERSchain.

I did a control-F and was surprised not to find the word “blockchain” in this whole long article about how “Intercontinental Exchange, which is known for transforming musty financial institutions into lucrative high-tech trading venues, is close to taking full control of Mortgage Electronic Registration Systems, which keeps track of almost 30m US home loans.” It’s a genuinely interesting story about the potential for improved back-office technology and electronic tracking of mortgages to transform the mortgage market and the economy:

What ICE intends to do is make it faster and easier to track who has issued home loans and who purchased them. Improved technology could hasten the adoption of digital mortgages and facilitate the process of securitisation, in which home loans are bundled for sale to big investors. …

If mortgage entitlements are easy to track electronically, then they can trade more easily and be sliced and allocated more efficiently. That more efficient market, combined with the cost savings of not tracking mortgages with boxes of paper documents, might make mortgages cheaper and more easily available. I realize that recent past experience might cause you to doubt that any of this is a good idea — “oh easier securitization, great,” you say sarcastically — but as a general matter more transparent and efficient markets are usually desirable, or at least desired.

Anyway these are all standard claims that you see about blockchain. Indeed they are often made about blockchain for real estate. And in fact maybe the right way to modernize MERS is with some sort of blockchain, why not. (“Mortgage assignments are pretty much the only area where I can think about blockchain application and not automatically cringe,” tweeted my Bloomberg colleague Tracy Alloway.) But the point is that the main benefit comes from electronification, from modernizing MERS, not from the particular data structure that is used to do it. The magic, if there is any, is in the legal techniques of securitization and the basic technology of putting stuff on computers; the specific technology of putting stuff on computers on the blockchain, by comparison, hardly merits a mention.

Things happen.

Climate Change Is Forcing the Insurance Industry to Recalculate. Inside Danske’s €200bn ‘dirty money’ scandal. Investors Fear Italian ‘Doom Loop’ as Bond Selloff Deepens. Elon Musk’s Ultimatum to Tesla: Fight the S.E.C., or I Quit. “A group of hedge funds in line to take control of Toys ‘R’ Us — the same group that pulled the plug on the retailer’s reorganization this year — intends to revive the business behind the Toys ‘R’ Us and Babies ‘R’ Us brand names.” GE Downgrade Will Lift Its Costs in a Debt Market It Once Ruled. Fed Rethinks How to Define a Big Bank. How China’s Peer-to-Peer Lending Crash Is Destroying Lives. IPO Market Has Never Been This Forgiving to Money-Losing Firms. Citi, JPMorgan and Others Sign on to Boost Diversity in Finance. Predicting Airfare Is a $750 Million Business. “A flight to Boston had to be diverted to Kansas City because an unruly passenger got verbally abusive and wouldn’t stop doing pull-ups on the overhead compartments.” Fitbit leads to murder charge for 90-year-old after stepdaughter found hacked to death. Oddly Satisfying Videos.

Oliver Smith

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