We have previously commented on Machines trading with machines to the enrichment of all. It really raises the question about value. I am not just talking about the more obvious effects of central bank money printing. We have commented on these already:
Who’d have thought that low interest rates would hurt self-funded retirees and other savers? That flooding the system with cheap money would push up the price of things money can buy, like food and other commodities? That these rising prices would feed into the price of other goods, undermining workers incomes. Not to mention the effects of ever increasing government debt. Debts governments will never pay back with coin of equal value. This undermines the currency, increasing import prices and further impoverishing workers, retirees and other savers.
But of what market prices signify in a world of quantitative easing and machines trading with machines. Michael Eisen’s post on Amazon’s $23 million book tells part of the story.
When going to sell a reference text on flies Michael noticed that two of the copies for sale were priced at over a million dollars. By following the price over several days he worked out that one of the sellers was using an algorithm to price its books at slightly less than the other. While the other bookseller was selling its book for slightly more.The two machines were bidding the price of the book up.
Amazon retailers are increasingly using algorithmic pricing (something Amazon itself does on a large scale), with a number of companies offering pricing algorithms/services to retailers… The behavior of profnath is easy to deconstruct. They presumably have a new copy of the book, and want to make sure theirs is the lowest priced – but only by a tiny bit ($9.98 compared to $10.00). Why though would bordeebook want to make sure theirs is always more expensive? Since the prices of all the sellers are posted, this would seem to guarantee they would get no sales. But maybe this isn’t right – they have a huge volume of positive feedback – far more than most others. And some buyers might choose to pay a few extra dollars for the level of confidence in the transaction this might impart. Nonetheless this seems like a fairly risky thing to rely on – most people probably don’t behave that way – and meanwhile you’ve got a book sitting on the shelf collecting dust. Unless, of course, you don’t actually have the book….
My preferred explanation for bordeebook’s pricing is that they do not actually possess the book. Rather, they noticed that someone else listed a copy for sale, and so they put it up as well – relying on their better feedback record to attract buyers. But, of course, if someone actually orders the book, they have to get it – so they have to set their price significantly higher – say 1.27059 times higher – than the price they’d have to pay to get the book elsewhere.
Of course there was no sale in this instance. But in a world of QE with unprecedented leverage, who knows what is going on? The volume of each trade need not be large. There are no shortage of financial institutions keen to keep up the apparent price of assorted securities. Just idle speculation you understand.
But when prices jump around in response to central bank stimulus measures, it’s hard to believe they are being priced based on the expected future profit stream of the underlying enterprise. I don’t see how this can end well.