Tuesday, April 22, 2014

Flash Bubbes: An Ebay Revolt

My mother-in-law (or Bubbe, to my kids,) takes ebay very seriously.  Anyone in the family needing to sell must run the gauntlet for her to consider risking her reputation on an item.  She won't let you photograph it yourself.  She won't let you ship it yourself.  But, if you sell with her username, you have instant credibility.

However, when it comes time to buy, what does she advise? Turn to Michael Lewis' villains, the high frequency traders.  The guys who throw massive computing power and light speed technology at their trades.  She never buys without a "sniper"--that's ebay lingo for a high frequency trading operation.  You tell them your limit price.  They take care of the bidding.  They place orders for you, at the tail end of auctions.  The more you pay, the longer they'll wait.  They virtually guarantee shaving a few bucks off that singing fish.

Think I'm exaggerating?  Read some choice details from a  TechRadar review of sniping tools:
Choosing the right number of seconds before the auction ends is crucial and takes time to get right... the speed of your internet connection can be crucial...[Auction Stealer's priority account] bids with only three seconds to go...With sniping, bidding in increments becomes extremely important.
This discussion has striking similarities to high frequency trading.  Auction Stealer has no legal obligations to make ebay fair.  Ebay barely has an obligation to make ebay fair.  What should they do anyway, require human beings input every trade?  (Back in the stone ages, like the mid-1990s, NASDAQ had that requirement!)

But isn't this front running?  No.  There are no agency relationships here.  Take an extreme case: What does Auction Stealer do when one "free" client bids on the same item as a Priority Account? I would have to believe the free client gets picked off.  Why?  Because Auction Stealer has no duty to either client. 

But stock trading is different, right? Michael Lewis is talking about co-locating servers and the speed of light, right?  Not really.  Imagine ebay traded billions of dollars a day and you didn't have to ship merchandise.  And, you thought you could actually sell that singing fish to some other sucker later.  Auction Stealer might start offering "Super Premium" accounts with co-located servers, with bids one millisecond before the auction end because they could make money at it.  And, they'd have plenty of competitors too.

Then what would happen?  Maybe a bunch of buyers and sellers would get together and form a competitor to ebay with a different set of rules, where no one gets to play that way.  They might go on a massive PR campaign to disparage ebay and tell the whole world their exchange is better.  Maybe they'll get 1% of Michael Lewis' press coverage too.