Friday, June 30, 2017

You Can’t Do That On Chat!

Since the global financial crisis, all sorts of investigations have gone on in the financial markets, and some very interesting chats have been made public. We're collecting some of the more saucy IMs and phone calls here, in their original form (with spelling errors retained):

UBS [Trader A]: and if u have stops….
UBS [Trader A]: oh boy
Deutsche Bank [Trader B]: HAHA
Deutsche Bank [Trader B]: who ya gonna call!
Deutsche Bank [Trader B]: STOP BUSTERS
Deutsche Bank [Trader B]: deh deh deh deh dehdehdeh deh deh deh deh dehdehdeh
Deutsche Bank [Trader B]: haha16 
June 2011 | electronic chat (likely) | Product: Silver Futures | Deutsche Bank & UBS
In re London Silver Fixing Ltd Antitrust Litigation Proposed 3rd Amended Consolidated Complaint

Trader to prospective cartel member: “mess this up and sleep with one eye open at night.”
2011 | electronic chat | Product: FX (one month trial to join "cartel") | Barclays | Link

(Future) Co-Head of UK FX Hedge Fund Sales: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”
Nov. 2010 | electronic chat | Product: FX | Barclays | Link

Broker-B (non-UBS) to Trader-1: “mate yur getting bloody good at this libor game . . . think of me when yur on yur yacht in monaco wont yu”
June 2009 | electronic chat | Product: LIBOR | UBS | Link

Employee 1 to Employee 2: “[We] can’t mark any of our positions [to market price], and obviously that’s what saves us having this enormous mark to market. If we start buying the physical bonds back then any accountant is going to turn around and say, well, John, you know you traded at 90, you must be able to mark your bonds then.”
June 2007 | telephone chat | Product: RMBS/CDOs | AIG | Link 

Analyst #1: Btw (by the way) that deal is ridiculous. 
Analyst #2: I know right…model def (definitely) does not capture half the risk. 
Analyst #1: We should not be rating it. 
Analyst #2: We rate every deal. It could be structured by cows and we would rate it.
April 2007 | electronic chat | Product: RMBS/CDOs | S&P | Link

Trader-10: “Good morning [Submitter-4], [Trader-10] here.. could we please ask you to put in low 1m fixing pls”
Submitter-4: “Difficlt, think [Senior Manager-6] wnarts it [] on the high side”
Trader-10: “Oh no!! But ladies first no ;))?”
Submitter-4: “First come first serve.”
Trader-10: “Exctly.. And we have been begging you for last two month!!”
Submitter-4: “But u dont sign my bonus right?”
Trader-10: “Hahah hmmm.. Unfortunately not...”
Oct. 2005 | electronic chat | Product: EURIBOR | Deutsche Bank  | Link

Trader 3: “LOWER MATE LOWER !!”
Submitter 1: “will see what i can do but it’ll be tough as the cash is pretty well bid,”
Submitter 1: “ok, let’s see if we can hurt them a little bit more then.”
Sept. 2005 | electronic chat | Product: LIBOR | Deutsche Bank | Link

Trader: “I was front running EVERY single offer in usdjpy and eurjpy.”
Trader: “call me a legend! Front run legend.”
Trader: “jamming some stops in eurusd here at 0515”
Trader: “the day of intervention, i was front running EVERY SINGLE ODA and I mean EVERY haha” 
Dates unknown (multiple) | electronic chats | Product: FX | UBS | Link

Wednesday, June 21, 2017

The Electronification of Consumer Pricing

Would it be interesting if we told you that owners of Apple products often pay more for the same product when purchasing it online?  What about if we told you that airlines might jack up the price of their products based on your level of enthusiasm for buying a ticket?  

A version of this is occurring in the United States.  We're going to explain some of the beauty of this process, from an efficient markets perspective, but we'll also try to home in on the ways in which it can be jarring, if you're the user/customer/client/consumer, that is.

Briefly, companies like,, or Home Depot or Walmart might "collect" data from you or your computer when you search for a product or a flight or a hotel -- or "make a request."  A user's request often brings with it information such as the user's browser, operating system, IP address and other information being maintained in what are called tracking cookies.  Of course, if you're logged in, the company may already have some of this information about you (your purchase preferences) or other information it cannot get via the cookies or IP address.

Based on your information, companies often personalize their results for you.  

There are at least two forms.  They might steer you, say, to relatively more expensive hotels if you're using an Apple product, as they might infer that you're relatively wealthy.  Or they might customize the pricing of the product based on your perceived level of interest.  A person who regularly flies home for Christmas may be a prime suspect for an increased price, or if a prospective buyer has already checked on the price of a flight twice previously, it might indicate that he's relatively more desperate to buy a specific ticket.

Image licensed by PF2 Securities from Condé Nast (New Yorker)
Different from typical supply and demand economics, the new age presents a form of dynamic pricing that measures a person's capacity and motivation for purchasing.  

Here, it's not just a demand of one unit or one ticket: it's a relatively enthusiastic or relatively needy and able buyer, as opposed to a marginal buyer, who may go elsewhere if the price is too costly.

From a company's perspective, they are using your information to price their product accordingly for you, and if they optimize this process, they can make a lot more money than store sales allow, with store sales typically requiring them to fix a single price per good.

One way to think of dynamic pricing is that it adjusts to you.  If you're regularly checking the price, it may just go up because you're checking it.

This seems in many ways to perfectly capture the idea of capitalism.  It may also be agreeable to consumers in perfectly competitive markets.  But absent perfect competition (e.g., the presence of some monopolies)  or when market players dynamically calibrate their models in a way that they seem to work in concert (even if it's not collusion), consumer-customers might feel they are being squeezed.

This graphic shows the results of ticket searches on Kayak's website and Google Flights on different days.
Several airlines are perfectly matching one another, to the dollar, on certain tickets (for better or worse).

Some jurisdictions take issue with price customization, which is often called price discrimination, although that term brings with it negative connotations.   While many jurisdictions have (or should have) legal concerns if price discrimination is gender or race based, some already have difficulties if the pricing is not objectively justifiable relative to the seller, for example, based on the specifics of the order (e.g., company's cost of producing it for a specific user, delivery location or quantity).  But many jurisdictions feel it is in the seller's power to adjust the price as he or she see fits, outside of, say, race and gender-based discriminatory issues.

The problem is magnified in the following example:

Suppose you want to buy a rare and expensive item -- maybe an sought-after watch or antique furniture or a Stradivarius -- and you call to ascertain its price and availability.  You drive 200 miles to buy it and, on arriving at the destination, the seller tells you that, since you asked after it, he realized that demand was high and he lifted the price in the intervening hours.  As a prospective purchaser, you might rightly feel that your eagerness to purchase the product was used against you (and you are now committed to purchasing at the newly higher price, given you have just driven 200 miles).

You were, in concept, taken advantage of.  But legally, is there anything wrong with that?  This is a question for the new age of online, inter-day price re-calibration.  Companies can publicly access or otherwise purchase information about your spending habits, even the price you paid for your home, and this data may help them fit their pricing algorithm, uniquely tailored for you.  This is happening.  This is the new world of e-commerce and we should try to understand and discuss the issues involved.  We welcome your feedback.


For further reading on dynamic pricing on e-commerce websites, see here.

For issues on pricing/valuation concerns in the financial markets, click here.

Monday, June 12, 2017

Disrupting our Antiquated Fixed-Income Markets

“A talent for following the ways of yesterday,” declared King Wu-ling of Zhao in northeastern China, in 307 BC, “is not sufficient to improve the world of today.”

Much is being written about bringing our debt markets into the electronic age.  (The FX and swap markets too, but that's a story for another day.)

The Economist recently called the corporate debt markets "astonishingly archaic" and also "shockingly archaic," for additional emphasis.  Despite the US debt markets dwarfing the equity markets (by a factor of about 7-to-1 in 2016) the magazine notes that basic price data are sometimes hard to come by, and the trading of bonds often requires a call to a bank's trading desk.  

The criticism is not ill-founded.  In the bond market, even to the degree some of the trading goes through electronic platforms, the dealers still hold the cards ... which is great if you're a dealer, and frustrating if you're not.  

There are some downsides, to the economy, of dealers commanding such a presence in the market.  One issue is price uncertainty, with investors only really knowing what the dealers (often their counterparties) tell them about pricing, supply and demand.  And with uncertainty, comes the potential for panic, warranted or not.  (For our European readers, some of this may be mitigated under MiFID II.)   

Another concern is that when dealers play the role of intermediary or market-maker, and investors get accustomed to this framework, the market can seize up quickly when the dealers suddenly withdraw.  When they stop supporting trading, or putting principal at risk, the market dries up... and with less liquidity, prices can drop suddenly, and we all know what that's like.

There are advantages to this system, too .... if you're a Silicon Valley-style "disrupter."  For disrupters, an antiquated system is a prime target for your energies.  Not that it's easy, but the recent flurry of news stories about the antiquated model being gamed, won't make it any more difficult to get some backers motivated to influence change.  (The FinTech revolution was arguably fueled by the financial crisis, and the diminished faith in the financial institutions.)   

We have pulled together some of the recent stories circulating about "bogus" dealer quotes and investor reliance (sometimes over-reliance) on dealer marks and representations.  Meanwhile, traders from Nomura are currently on trial (jury is deliberating) and a Jefferies trader has been convicted for misrepresenting prices.  We don't see that in the market for Apple stocks.  There's an agreed-upon price. 

The problem, to a degree, is that there's a financial motivation to lie and it's just so easy to get away with lying or fibbing or bluffing: the market is opaque, and there is a high degree of subjectivity brought to the pricing/trading process, making it ever more difficult to separate true from false, without the evergreen trader chats, that is.    

Click here to read about the (endless) ongoing investigations into pricing/valuation issues (and broker quotes).

Click here to read about a dude at JPMorgan who is enticing Silicon Valley and Silicon Beach to get a move-on in disrupting this market, or else he'll do it faster himself.  That's his job, and he has a sizable budget to work with.  The red flag has been raised, but this time by the bull.


The Economist's articles can be found here and here (subscription required on your second click).