Tag Archives: manipulation

Ralph Nader on gasoline prices

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Michael Giberson

If you’re looking for another point of view on gasoline prices, Ralph Nader has an article in Counterpunch, “The Gas Gougers.” In the article Nader blames speculators, a lazy media, and a business-friendly government for the recent 50-cent run up in gasoline prices.

There was a time when even a few cents increase in the price of gasoline or natural gas would provoke Congressional investigations, actions by state Attorneys General, and condemnations of the producer countries, the OPEC cartel and Big Oil from presidents and the heads of antitrust divisions of the Justice Department or the Federal Trade Commission. That is, until smooth, smiling Ronald Reagan came to Washington, D.C. with his mantra that “government is not the solution; government is the problem.”

Curiously, “Reagan came to Washington” back in January of 1981, so I’m having trouble understanding how that moment connects to a gasoline price increase in January 2013, some 32-years later.

Nader might say his point is that now the industry can raise prices and not worry about government interference. But if the industry could freely raise prices without government interference, why did they wait 32 years to claim this particular 50-cent per gallon prize? Why didn’t the oil and gas industry raise their prices this much a year ago, or two years ago, or thirty?

Each price surge in recent decades seems to have different principal causes. This time it seems to have been precipitated by surging prices of crude – easily manipulated – and in the U.S. the permanent or temporary shutdown for repairs, of too many refineries.

Believe it or not, the U.S. is now a net refined petroleum importer because of the continuing refusal by the industry to rebuild or expand refinery capacity on the very sites where many refineries have been shut down, often in favor of offshore, cheaper installations.

Whenever supply and demand for refined oil products is tight, all it takes is for one or two refineries to suspend operations, other than for repairs, and the prices surge all over the country.

The “easily manipulated” price of crude oil? So again, explain why the industry keeps manipulating the price up and then back down again? Perhaps more to the point, why did the industry tolerate 15 to 20 years of low and relatively stable crude prices starting in the mid-1980s (during the Reagan administration!)?

“Easily manipulated” and yet seemingly so hard to control.

And, believe it or not Mr. Nader, the U.S. is now a net refined petroleum products exporter–not a net importer–and has been since mid-2011. Somehow, despite the continuing refusal to rebuild or expand refinery capacity, we have petroleum products in such abundance that we can ship them overseas. I’m sure once Mr. Nader figures out his facts are exactly backwards, he will immediately revise his claim and give the oil and gas industry credit for maintaining surplus refining capacity.

And it turns out that one or two refineries (in California) can suspend production and have essentially zero effect on prices anywhere in the country (but in California, as price data from last year reveals). Similarly, disruptions of refineries in the Northeast don’t seem to spread consequences too broadly across the country.

Nader thinks political grandstanding and government participation in oil markets and refinery operations is called for: Obama should use his bully-pulpit to put the heat on Congress; Obama should release oil from the Strategic Petroleum Reserve to push prices down; the Defense Department should build it own refinery capability and sell excess products into the market to suppress prices.

Nader seems to pine for the energy policies of the 1970s–before Reagan came along–but maybe he should review that decade of periodic energy crises, government oil and gas price controls, import tariffs and oil allocation schemes, calls for energy independence, and repeated Presidential addresses to the nation about the seriousness of increasing energy scarcity. I don’t think it worked as well as he seems to think it did.

When will manipulation of public prediction markets begin to work?

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Michael Giberson

At Constructive Economics, Abe Othman discusses a purported manipulation attempt in Intrade’s Health Care Reform bill market.  The nut of the story is that early on March 17th a trader apparently poured a bit of money into the market, briefly driving the price from around 60 down to 35.  After a few hours the price bounced back into the 60s; if it was manipulation, it failed.  But Othman speculates about a future in which manipulation would work.

Because the Intrade price can be interpreted as an estimate of the likelihood that the bill will pass, a sharp fall in the price could indicate new information reaching the market suggesting the bill will fail.  In the manipulation story presented by Othman, a new perception the bill is failing could be used to pressure the weakest members of the coalition supporting the bill to drop out (Maybe the argument goes, “Why go down with a sinking ship, when you and your constituents never wanted the ship in the first place?”).  As support actually falls, the likelihood the bill passes drops with it.  The manipulated price becomes, with a little lobbying, a correct prediction.

While Othman recognizes that the purported manipulation failed this time, he wonders whether prediction market prices will become sufficiently trusted that such a manipulation will work.  In fact, he predicts, “It’s only a matter of time, a couple years I would guess, before the kind of manipulation I’ve described actually works.

I disagree.

While it is true that a trader can often move the Intrade price relatively cheaply, because the markets often are thin, it is well known that a trader can move the Intrade price.  No half-way sophisticated interpreter of Intrade price data would take a sudden sharp move based on a few trades as proof of changing fundamentals, at most it might inspire the viewer to scan for new news.  It was only a few hours after the March 17 episode before bloggers were calling “manipulation!“  Are observers going to become less willing to call “manipulation!” in a couple of years? No.

While it is true that a trader can often move the Intrade price relatively cheaply, because the markets often are thin, holding the market to the manipulated target price can get expensive.  A manipulator can’t buy the price signal, he just rents it for a while.  And the rental rate will tend to rise over time because the mis-pricing will attract informed traders to trade against the manipulator.

Maybe this gets interesting.  So long as the markets are thinly traded then the market signal can be rented cheaply, but observers treat the signal as cheap talk.  What if talk is not cheap?  Can a deep pockets manipulator actually buy the market price?  That is to say, can the manipulator rent the signal long enough to overcome the “cheap talk” dismissal and change the likelihood of the outcome? I’d say this would work only in a world in which enough market observers  trust the market price summary more than all of the other information available about the subject of the prediction market, but this is unlikely to be the world we live in.

I predict: this kind of manipulation will not happen within the next several years.

How to fake sincerity in reporting quarterly results

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Michael Giberson

The Wall Street Journal reports on research analyzing quarterly reports (nearly 1/2 a million of them from over a 27-year period) which discovered strong circumstantial evidence that companies tweak their results to improve reported earnings.  The evidence? The number 4 occurs less frequently than chance would dictate in the tenths of a cent digit for quarterly earnings.  Pushing an initially calculated 0.4 cent result just a little will get it to 0.5 cent, and 0.5 cent can be rounded up to the nearest whole cent, which can make the difference between making or just missing a quarterly target.

The study, conducted by folks at Stanford, also found that that companies that later restate quarterly earnings or become charged with accounting violations report far fewer 0.4 cent results on average, compared to other firms.

The article quotes one of the study’s author, Stanford law professor Joseph Grundfest, as suggesting the pattern may be “a leading indicator of a company that’s going to have an accounting issue.” Maybe so. But now that this study has been publicized, it suggests a way to fake a signal of quality: just fudge them up to a 0.4 cent end. Be suspicious of a company that hasn’t had a 0.4 earnings result for the last ten years if they start reporting 0.4 cent results all of the time.

FERC directs New York power system operator to fix “loop flow” scheduling problem

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Michael Giberson

Today the FERC approved public release of the results of an internal staff investigation into allegations of “loop flow”-based market manipulations in the New York ISO market (see links below):

In this order, we authorize the public disclosure of the attached Office of Enforcement Staff Report (OE Report) addressing its non-public investigation of alleged market manipulation in the placing of circuitous schedules in the Lake Erie region. … For the reasons discussed below, we adopt the OE Report’s findings and conclusions that there was neither market manipulation nor tariff violations on the part of the entities placing these schedules. In addition, we have decided not to take further action on certain other tariff violation claims….

Generally speaking, the order indicated that the staff found no tariff violations nor market manipulation, but rather that certain market participants were simply reacting to market signals which induced them to schedule certain transactions from New York into PJM over ‘circuitous schedules’. (Strictly speaking, since charges for export transactions are often set administratively rather than by markets, I’d say market participants were opportunistically gaming the mixture of regulated rates and market prices offered up by the system.) FERC also directed the NYISO to develop a long-term solution to the problem within 180 days, and indicated that should the NYISO not file a solution that the FERC would take additional action.

The basic issue here arises because of the differences between how power transactions are scheduled for commercial purposes and how power actually flows between separately managed but interconnected power markets. A trader scheduling a power flow between New York and adjacent PJM could choose between a direct path or a more roundabout path (scheduling from New York through Ontario and the Midwest ISO, and entering PJM from the west). The choice of direct or indirect schedule doesn’t affect the actual power flow, just how the trader gets charged for the use of the transmission system.

When congestion costs became high in the NYISO system, it became cheaper for the trader to schedule a trade over the indirect path.  In the distinction introduced above, I’d say that charges for use of the direct path are more market-based, while trade over the indirect path mostly reflects regulated rates for export transactions. The problem arises because the trade will exacerbate the congestion problem in the system, but the trader will not be charged for all of the added costs. Instead, the costs get averaged into the bill of all system users.

While the actions apparently did not violate the NYISO tariffs or the commission’s market manipulation standards — I’m not an expert on those issues so I’ll take FERC’s conclusions on that issue — the indirect schedules clearly constitute an example of opportunistic behavior that should be discouraged. Opportunism in this context can be described as action which increases the profit of the trader but reduce the overall gains from trade (i.e. economic surplus or social welfare) produced in the market.* Because the indirect scheduling method reduced the costs paid by the trader, but caused the system as a whole to operate less efficiently, it is an opportunistic behavior.

It is an appropriate goal for public policy and the market operator to seek to deter opportunism in markets, so even in a case where no tariff violations were found it is clearly appropriate for the NYISO to revise its rules to prohibit such actions.

NOTES: Links to the FERC press release and order including staff report. This issue was previously discussed here, see my initial analysis and subsequent comments here and here.

*And therefore I think the term “gaming” appropriate. The definition of opportunism used derives from Amitai Aviram’s “Regulation by Networks,” BYU Law Review (2003), Aviram cites to Robert Cooter, “The Theory of Market Modernization of Law,” International Review of Law and Economics, (1996).

Onions, oil, speculators, congress

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Michael Giberson

From Platts Power Line blog, a discussion of the 1958 law banning of futures trading in onions and suggestions that Congress should contemplate the lessons from that experience before it gets too exciting about clamping down on speculation in energy commodities.

The ban on onion futures trading, introduced by freshman congressman Gerald Ford of Michigan in 1958, was supposed to reduce price volatility in onion markets. It didn’t work.

A short article by Roger Gray in the 1963 Journal of Farm Economics indicated that storage season price volatility was significantly reduced during the years of active onion futures trading, as compared to the years before and after that trading. Related discussion by Holbrook Working in the 1963 Food Research Institute Studies also supports that conclusion.

Much more recently, David Jacks published “Populists versus Theorists: Futures markets and the volatility of prices” in the 2007 Explorations in Economic History. Jacks discusses several cases in which futures markets have been banned, and some cases in which a ban was instituted and then repealed. His main conclusion: “the results presented in this paper strongly suggest that futures markets were associated with—and most likely caused—lower commodity price volatility.”

Not every analysis of volatility and futures trading finds that futures trading always reduces volatility – the wikipedia article on the Onion Futures Act mentions Aaron Johnson’s “Effects of Futures Trading on Price Performance in the Cash Onion Market, 1930-1968″ as concluding onion prices were more stable after the ban (I haven’t actually read this study, so can’t vouch one way or the other for it) – but the overwhelming result from many, many analyses of the issue finds that futures markets tend to reduce price volatility.

SEE ALSO: Commentary by Jon Birger, What onions teach us about oil prices, Fortune.

REQUEST: Some references I looked over this morning indicated that an infamous onion futures market manipulation in 1956 fostered political support for the ban, but I haven’t found a good discussion of the episode. If you know of one, put a reference in the comments.