Craig Pirrong's Blog, page 82

Trump Axes Comey, But Hillary Put His Head on the Block

Trump’s firing of FBI director James Comey has released yet another frenzy of hysteria in The Swamp. One has to take one’s amusement where one finds it these days, and in this episode that would be from watching Democrats and anti-Trumpers who only days ago were calling for Comey’s head in a basket, now shrieking laments and rending garments because . . . Comey’s head is in a basket. If I roll my eyes any more I am going to detach a retina.

One other source of amusement is that Hillary, who couldn’t shut up about Comey since the election, has been silent since he got it in the neck.

The reigning narrative is that Trump is attempting to subvert justice by impeding the investigation of his ties with Russia. If this is what he was thinking, he is sadly deluded. Congressional investigations continue, and if anything, firing Comey will galvanize them. Further, the FBI personnel actually doing the investigation are likely to continue to do so, and if they are indeed onto something the firing will only make them more suspicious and motivated.

Trump being Trump, I think the truth is probably very different. Two things stand out to me. First, Trump stated in his letter that Comey had personally absolved him of the Russian accusations on three separate occasions. (Today Trump doubled down on that, saying Comey better hope there are no “tapes” of their conversations if he was thinking of leaking a denial.) Second, Trump is/was reportedly furious at the way Comey absolved Hillary last summer. Putting those pieces together, my guess is that it went down something like the following. Comey tells Trump that he is not under investigation and/or that there is no evidence of Russo-Trump collusion. Trump demands that Comey state that publicly. Comey demurs, saying that would be a violation of procedure. Trump loses it, and says “you did it for Hillary!” Comey mumbles something about how that was different, and then goes in front of Congress and refuses to admit that he erred in his handling of Hillary’s email. Trump figures that the guy is an untrustworthy political hack, and goes into Apprentice mode.

Truth be told, regardless of the political advisability of the firing, Comey had justly earned his termination. Comey’s investigation of Clinton was very irregular from the first: he violated standard procedures at every turn, which in addition to being wrong in itself, would make a mockery of any appeal to the need to be scrupulous in following them now. Further, he had arrogated to himself the responsibilities of the Attorney General by deciding not to prosecute Clinton. He sucked up to the Lynch (and Obama and Clinton) by taking her off the hook of making the prosecutorial call. When that unleashed a political storm from the right, he tacked and released his eve-of-the-election letter. Then he crowned this series of misadventures by mis-stating the basis for the renewed investigation in testimony before Congress: Huma shared only a handful of emails with Anthony Wiener, not the hundreds or thousands Comey claimed in his testimony.

Richard Epstein, hardly a Trumpophile summarizes well:

But, if anything, he [AAG Rod Rosenstein] understated the case against Comey. First, he treated the initial investigation of Hillary Clinton back in March 2015 with kid gloves. There were the inexcusable decisions to grant immunities to key Clinton backers without first serving them with a subpoena that would have allowed the FBI to extract a quid pro quo for any immunity that thereafter might be granted. Second, the FBI allowed Clinton’s key aide Cheryl Mills, Clinton’s former chief of staff, to act as her legal counsel, even though she herself was a legitimate target of investigation who could have faced charges. And they did not conduct any of the ambush interviews that are commonly given in cases where criminal prosecution is warranted. The obvious inference is that Comey was kowtowing to his superiors in the Obama White House.

Next, of course, was his public statement on July 5, 2016, in which he gave a thoroughly unsatisfactory explanation as to why he chose not to prosecute Clinton for her use of an unauthorized server that, in a case involving lesser persons, would have resulted in serious criminal charges, wholly without regard as to whether unauthorized persons hacked into the site (which they surely did).

Once Attorney General Loretta Lynch, as Judge Laurence Silberman wrote, “sort of half-recused herself” from the case, any charging decision should have been made by or at the direction of Sally Yates, the deputy attorney general. As Rosenstein rightly said in his memo, no experienced law enforcement figure thought that Comey acted correctly in issuing a public statement that explained his point of view.

Finally, his late October surprise, rightly castigated by none other than the New Yorker’s Cassidy, that he was conducting another investigation of Clinton, one that went nowhere, was likewise a breach of his duties.

The common response to this line of attack is that criticisms of Comey’s conduct in the Clinton investigation had nothing to do with the president’s decision, which was made, we are confidently told (on the basis of no firm evidence), because Comey was hot on the trail of information about possible ties between Trump, his supporters, and the Russians during the campaign. But it is also the case that Comey has made no effort to distance himself from this earlier conduct, and indeed affirmed in his Senate testimony of May 3, 2017, that with respect to his October 28 letter on Clinton, even though the episode had made him “mildly nauseous,” he would do it all over again.

The past events thus are linked closely to the future events. If the mistakes Comey made could have justified his firing in either 2015 or 2016, the passage of time does not cure those improper decisions.

Comey played the part of political weasel throughout, and his fate was the one the like usually suffer.

As for this being a “Constitutional crisis” or a “coup” (as David Frum and others hyperventilated), puh-lease. Trump is Chief Executive, and the FBI is in the executive branch. QED. Even Comey acknowledged that he serves at the president’s pleasure. As for a coup. Er, it would be a coup if the FBI Director removed the president, not the other way around.

Although Comey wove the basket in which his head now lies, ultimately  Hillary Clinton is the one who put his head on the block. Her grotesque misjudgment and malfeasance in using private email and lying about it repeatedly set in the train the events that culminated in Comey’s firing. But this is nothing new, is it? Recall what Jim McDougall said, years ago: “I think the Clintons are really sort of like tornadoes moving through people’s lives. I’m just one of the people left in the wake of their passing by, but I have no whining or complaining to do, because I have lots of company.” Though departed from this  vale of tears, Mr. McDougall has yet more company, in the form of one James Comey.

Whatever Igor Wants, Igor Gets: Primitive Capital Accumulation, a la Sechin

Apparently winning the “auction” for Bashneft (after it was widely claimed by Putin, and others, that a sale of the company to Rosneft would be a sham privatization) wasn’t enough for Igor Sechin. Igor is now after MOAR, and is using the “legal” process to get it. Rosneft has filed suit against the former owner of Bashneft, Vladimir Evtushenkov’s holding company Sistema, and is asking for a cool $1.9 billion. News of the suit knocked almost 40 percent off of Sistema’s stock price.

The grounds of the lawsuit are unclear.

In the past Sechin has complained about a sale of a Bashneft asset, oil services company Targin, to Sistema at an allegedly knock-down price. He has also criticized contracts between Targin and Bashneft entered into after the sale as unduly favorable to Sistema.

Both of these allegations are plausible. This is Russia, after all, and related-party transactions and Credit Mobilier-like contracting scams are classic ways of tunneling assets.

Recently Rosneft has had to spend $100 million to address safety problems at Bashneft refineries. Rosneft claims that it has found “irregularities.”

If commercial and legal logic mattered (a big if, I know), the alleged shenanigans involving Targin would not be grounds for a suit, and it would be hard to imagine how Rosneft would have standing. Recall that Bashneft was seized by the state in 2014, and Rosneft bought it from the government. So any uneconomic transactions in 2014 or earlier would not harm Rosneft: it would have known that Targin was not included, and what the contracts were. So Rosneft was not harmed by what happened before the company was nationalized.

Failure to detect “irregularities” at the refineries would suggest a lack of due diligence if these were not discovered prior to buying from the state, or if they were known, they would have been reflected in the price. Again, it is hard to see how Rosneft could have been defrauded. Further, there’s a big difference between a $100 million repair bill and a $1.9 billion legal claim.

But does it matter, really? Any legal claim is almost surely a pretext to expropriate a politically vulnerable oligarch who is, shall we say, Без крыши. And this strategy is in Rosneft’s DNA. After all, the company was built primarily on the assets seized from Yukos, and another big asset–TNK-BP–was obtained only after a campaign of pressure against BP (although the Russian AAR consortium held their own and were paid in cash). Put differently, Rosneft was built by  what Marxists called primitive capital accumulation–force and fraud, sometimes operating under the color of legal authority.

But there is a price to be paid for this. It shows that Russia remains a fraught place for investors with assets that come under the covetous eyes of Sechin, or others like him. This depresses valuations for Russian companies, and is a serious drag on investment. No wonder year in and year out Russia is notable for the small share of investment, which runs about 18 percent of GDP, very low for a country in its stage of development. (The world rate is about 24 percent.)

But whatever Igor wants, Igor gets, evidently. Even though what’s good for Igor isn’t good for Russia.

Son of Glass-Steagall: A Nostrum, Prescribed by Trump

Apologies for the posting hiatus. I was cleaning out my mother’s house in preparation for her forthcoming move, a task that vies with the Labors of Hercules. I intended to post, but I was just too damn tired at the end of each day.

I’ll ease back into things by giving a heads up on my latest piece in The Hill, in which I argue that reviving Glass-Steagall’s separation of commercial and investment banking is a solution in search of a problem. One thing that I find telling is that the problem the original was intended to address in the 1930s was totally different than the one that is intended to address today. Further, the circumstances in the 1930s were wildly different from present conditions.

In the 1930s, the separation was intended to prevent banks from fobbing off bad commercial and sovereign loans to unwitting investors through securities underwriting. This problem in fact did not exist: extensive empirical evidence has shown that debt securities underwritten by universal banks (like J.P. Morgan) were of higher quality and performed better ex post than debt underwritten by stand alone investment banks. Further, the  most acute problem of the US banking system was not too big to fail, but too small to succeed. The banking crisis of the 1930s was directly attributable to the fragmented nature of the US banking system, and the proliferation of thousands of small, poorly diversified, thinly capitalized banks. The bigger national banks, and in particular the universal ones, were not the problem in 1932-33. Further, as Friedman-Schwartz showed long ago, a blundering Fed implemented policies that were fatal to such a rickety system.

In contrast, today’s issue is TBTF. But, as I note in The Hill piece, and have written here on occasion, Glass-Steagall separation would not have prevented the financial crisis. The institutions that failed were either standalone investment banks, GSE’s, insurance companies involved in non-traditional insurance activities, or S&Ls. Universal banks that were shaky (Citi, Wachovia) were undermined by traditional lending activities. Wachovia, for instance, was heavily exposed to mortgage lending through its acquisition of a big S&L (Golden West Financial). There was no vector of contagion between the investment banking activities and the stability of any large universal bank.

As I say in The Hill, whenever the same prescription is given for wildly different diseases, it’s almost certainly a nostrum, rather than a cure.

Which puts me at odds with Donald Trump, for he is prescribing this nostrum. Perhaps in an effort to bring more clicks to my oped, the Monday after it appeared Trump endorsed a Glass-Steagall revival. This was vintage Trump. You can see his classic MO. He has a vague idea about a problem–TBTF. Not having thought deeply about it, he seizes upon a policy served up by one of his advisors (in this case, Gary Cohn, ex-Goldman–which would benefit from a GS revival), and throws it out there without much consideration.

The main bright spot in the Trump presidency has been his regulatory rollback, in part because this is one area in which he has some unilateral authority. Although I agree generally with this policy, I am under no illusions that it rests on deep intellectual foundations. His support of Son of Glass-Steagall shows this, and illustrates that no one (including Putin!) should expect an intellectually consistent (or even coherent) policy approach. His is, and will be, an instinctual presidency. Sometimes his instincts will be good. Sometimes they will be bad. Sometimes his instincts will be completely contradictory–and the call for a return to a very old school regulation in the midst of a largely deregulatory presidency shows that quite clearly.

 

Carter Page Doesn’t Prove the Existence of a Trump-Putin Nexus: He Proves Its Non-Existence

The linchpin of the supposed Trump-Russia connection is one Carter Page. Rather than demonstrating the existence of some deep, dark conspiracy, this fact demonstrates just how farcical the entire idea of such a conspiracy is.

Carter Page was a fringe figure on the make in Russia. He tried assiduously to cultivate business contacts there, with vague–if any–success. He also tried to forge political connections in the US, which apparently brought him to the attention of some Tea Party guy from Iowa named Sam Clovis. Clovis worked on the Trump campaign (and has since been rewarded with the august position of White House representative to the USDA). Clovis put Page’s name on a list of potential policy advisers, and when Trump was asked about his foreign policy advisers in March, 2016, Trump apparently pulled that name off the list.

Working from the other direction, as a guy trying to make connections in Russia, Page obviously came to the attention of the SVR, Russia’s foreign intelligence service. In 2013 he met with Russian diplomats & a businessman, who were subsequently identified as Russian agents. Page was lecturing about energy policy at NYU (in the kind of position that one sometimes obtains by advertising “will teach for food”) at the time, and claims he gave his Russian interlocutors some teaching notes. Page later gave a speech at the New Economics School in Moscow. After the election he met with Sechin.

And that’s about it.

In brief: Page came to Trump’s attention precisely because he had no advisors with connections to Russia, and was under continuous attack for the thinness of his foreign policy expertise and the absence of any eminent foreign policy advisers. Page’s connections were gossamer thin–he was a wannabe playa in Russia, not a real one. But he’s the best Trump could come up with on the spur of the moment. Similarly, if the SVR (or FSB or GRU) had strong connections with anyone actually close to Trump, they wouldn’t have needed Carter Page.

Thus, the fact that everything rests on Page shows just how tenuous the Trump-Russia connections were. Trump had nobody with real ties to Russia, so he reached out for a nobody who at least had some involvement there; The Russians had nobody, so they courted the same nobody (e.g., rewarding him with a meeting with Sechin in December). If there was a strong Trump-Russia nexus, Carter Page wouldn’t have warranted the time of day by either Trump or the Russians.

The lecture Page gave at the New Economics School is often raised to illustrate Page’s Russian connections. Pardon my French, but what a fucking joke, and one that illustrates that the people who opine on the Trump-Russia connection don’t know squat. The New School was originally, and remains to some degree, aligned with the liberal elements in Russia. It is hardly a siloviki front, and was established with the specific intent of becoming a western-style academic institution favorable to liberal, western ideas. Many of the faculty had degrees from western (mainly US and UK) universities. One of its initial supporters was George Soros, for crissakes.

One salient story says it all. The New School’s former rector, my friend Sergei Guriev, criticized the Russian government’s prosecution of Khodorkovsky, and the loss of freedom in Russia generally, and soon came under such pressure that he was forced to go into exile in France. If anything, a connection with the New School is likely to raise suspicions among the FSB et al, and hardly indicates influence among the Putinists.

Page’s academic connections also illustrate his irrelevance. The people around Putin aren’t known for their scholarly depth, or their commitment to rigorous academic research. Indeed, the deepest connection of them to academia is to get fraudulent academic credentials–including PhDs–to burnish their résumés. Serious academics exert very little real influence in Putin’s Russia.

But Carter Page was very, very useful–to the FBI. They used his connections with Trump and Russia, tentative as they were, (along with the ridiculous dossier, in which Page was mentioned) as a pretext to get a FISA warrant to put him under surveillance. This, in turn, potentially gave them some justification and legal authority to intercept other communications involving Trump people, presumably on the knee-bone-connected-to-the-thigh-bone theory: Page talked to X, X talked to Y, Y talked to Z who talked to Trump, so investigate X, Y, and Z and maybe Trump. Give the FBI a micrometer, they’ll take a million miles.

This also means that Page’s importance has to be hyped by leakers and those in politics and the media intent on creating Russiagate. But viewed more objectively, the fact that that the story apparently begins and ends with first-class nobody Carter Page shows that Trump had no real connections in Russia–especially with the siloviki or Putinists–and the Russians had no influential connections in the Trump camp.

This is a self-inflicted wound for Trump, and an inevitable consequence of his untraditional, helter-skelter, and extemporized insurgent campaign. A more traditional and organized campaign wouldn’t have had to pull a nobody’s name off a list prepared by a nobody. This created a vulnerability that his enemies are flogging for all they are worth.

That said, it is also very telling that the FBI seized on this sad sack to justify an investigation. It is pretty clear that they were desperate to a pretext to investigate the Trump campaign, quite likely due to political pressure emanating from the Obama administration, and as a way of compensating for the damage that the email investigation (and Comey’s to-ing and fro-ing about it) was doing to the Clinton campaign. The centrality of Page in this investigation also reveals that the FBI has nothing substantive, and never really did. But it soldiered on nonetheless. Appalling, but again, the FBI seized on an opportunity that Trump gave them.

So as with most of the Acela Corridor conventional wisdom, the obsession with Carter Page inverts reality. Rather than indicating the existence of a deep connection between Putin and Trump, Carter Page shows that such connections were completely non-existent.

European Elites: Vicious in Victory, Bitter in Defeat

The first round of the French presidential election occurred today, with Marine Le Pen winning by about two points, with Emmanuel Macron coming in second. These two will face off in a few weeks, with Macron universally considered to be the inevitable winner, and by a large margin.

It is hard to imagine a more vapid political figure than Macron. His eventual win will therefore be quite gratifying to the Germans, and to the EU, who will have the empty vessel that they desire as French president.

The relief of elite France, and elite Europe, is palpable. Although Le Pen made the final round, the belief that she will be defeated has convinced the elites that the scourge of populism–which they all too often characterize as the second coming of Nazism (thereby gravely insulting their own fellow citizens and trivializing the evils of the Nazis)–has been defeated, and that the European project can continue to sail along, with no correction in course necessary.

A more reflective elite would ask why populism has been so resurgent, and why they have to keep beating it back in country after country–sometimes just barely, and sometimes not at all (e.g., Brexit). A more reflective elite would recognize that their triumphalism, and their insulting of those they have defeated–in this election–will only stoke resentments. A more reflective elite would recognize that populism is flashing a warning that a course correction is desperately in order.

But modern elites in Europe (and in the US too) are anything but reflective. They are smug, arrogant, and dismissive. The ideal is to be magnanimous in victory, gracious in defeat. Modern elites invert that. They are scornful and dismissive and even vicious in victory, and bitter and angry in defeat.

Which is why they may triumph in France in a few weeks, but risk a crushing loss in the longer run. Failing to respond to the rumblings of populism today greatly increases the risk that the EU will fail in the future.

Cultural Appropriation: The Left’s Latest Power Through Balkanization Play

The left’s newest (or one of the newest–it’s hard to keep up) Trojan Horse of tribalism is “cultural appropriation,” e.g., a white person wearing dreadlocks. To illustrate how absurd it has become, consider this article in Teen Vogue–the fact that it is in Teen Vogue also illustrates the thoroughness with which the left attempts to penetrate impressionable minds.

Silly me, but I thought that imitation was the sincerest form of flattery. That one did not want to dress like or eat like or act like or listen to the music of those one despised or detested–quite the opposite.

But no. Apparently “cultural appropriation” is an existential threat. Literally existential. It is increasingly common for college students in particular to say that witnessing an act of cultural appropriation (or hearing a contrary opinion) threatens to annihilate their existence. Annihilate.

Like all things left, this is another mechanism of social control, and a very intrusive one. About as intrusive as possible. Other people are literally telling you what you can wear, how you can style your hair, what entertainment you can enjoy. Based on their claims about the entirely subjective impact of your behavior on them.

The control mechanism works in a variety of ways. One is by creating a cultural Tower of Babel that facilitates divide and conquer.

It is also part of the weakness-is-power strategy, the left’s current preferred MO. A group claims victim status, and alleges its powerlessness at the hands of a group that it hates. Emphasizing their weakness, the aggrieved appeal to the authorities for help. The authorities, who often detest the same group, swoop in to protect the self-proclaimed defenseless victims.

This is a symbiotic relationship between the self-proclaimed marginalized and authorities in certain organizations (academia, surely, and often in government and corporations) that allows them to exercise control over a common enemy.

This helps explain the hyperbolic and hysterical nature of the complaints. “I don’t like that,” or “that hurts my feelings” are hardly grounds for exercising control over what others do or say, right down to their hairstyles. But metaphorical murder–“annihilation of existence”–warrants strenuous action by the authorities.

This trend–and sadly, it is a trend–is profoundly un-American and anti-American. For America has always been a syncretic society. Music is perhaps the best example: American popular music is a veritable Gordian Knot of intricately woven cultural strands. No, the process of amalgamation has never been smooth or easy, but the ideal that there was an American identity that integrated multiple national and cultural identities, and transcended them, made the process work better here than it has worked anywhere else ever.

If it gains traction, the idea that “cultural appropriation” is tantamount to genocide will make not only integration and amalgamation impossible, but it will even make impossible mere peaceful coexistence between disparate groups: live and let live is the antithesis of this movement. It is a recipe for conflict along national, ethnic, cultural, and racial lines. So many borders to be defended. So many existential threats. A war of all against all is the inevitable result.

But that plays right into the hands of progressives who occupy the commanding heights of our institutions, doesn’t it? After all, they must intervene in order to keep the peace. Funny how that works out, isn’t it?

The Left Loses Its Mind (Again!) Over Citgo and Trump

Donald Trump is the left’s Theory of Everything. To be more precise, it is the left’s Theory of Everything Bad.

Latest (nut) case in point: Rachel Maddow is blaming Trump for the riots in Venezuela. No-really!

The theory: the Federal Election Commission revealed that Citgo, a US subsidiary of Venezuela’s national oil company/basketcase PDVSA had donated $500,000 to Trump’s inauguration. According to Maddow, this sent Venezuela’s citizenry, which is reeling under an economic catastrophe wrought by Chavez, Maduro, and “Bolivarian Socialism”–a cause that the left from Bernie Sanders to Danny Glover to many others has swooned over for years–into paroxysms of rage at the thought that their national patrimony was paying to honor the evil Trump.

To start with, there have been violent protests in Venezuela for years. The country is facing economic collapse. PDVSA has been looted by the Chavistas for going on 15 years now, and is a complete wreck. $500K is chump change compared to what the leftist darlings have stolen from the company, or destroyed through their grotesque mismanagement–would that the left shown equal concern over THAT. The country is on the verge of hyperinflation. There are food lines. There is no toilet paper–unless you count the currency the Venezuelan central bank is cranking out like nobody’s business. I could go on and on.

So no, Rachel. The Citgo contribution to the inaugural fund–which represents less than .5 percent of the total raised–is not even a piece of dust on the straw on the camels back: the camel’s back was broken long ago, by the vanguard of socialism that Rachel Maddow and her crowd lionized for years. The rage of the Venezuelan people is directed precisely where it should be: at Maduro, the Bolivarian revolution, and the dirt-napping Chavez.

Maddow’s attempt to lay Venezuela’s social explosion at Trump’s feet is very revealing. She and her ilk think that everything is about us–the US that is. Everything. And now in the minds of her and her ilk, everything in the US is all about Trump. So everything everywhere is all about Trump, and supposedly everyone in the world is as obsessed with Trump as they are, and blame him for all that is bad in the world, like they do.

This is clinical solipsism, broadcast live on MSNBC and CNN daily.

And in fact, Rachel should be ecstatic at Citgo’s donation. The company wasn’t spending the money of the Venezuelan people–it was spending Igor Sechin’s money! Rosneft brilliantly–brilliantly I say!–lent PDVSA $5 billion, and negotiated a 50 percent stake in Citgo as partial security. (Rosneft’s brilliance is only surpassed by the Chinese, who lent Venezuela $55 billion. Hahahaha. Good luck collecting on that one Xi! Well played.) Given PDVSA’s parlous condition, it is highly likely that Rosneft will get control of Citgo, meaning that every dollar it spends now is a dollar less in Igor’s pocket.

So the left should be happy! Trump has picked Russia’s pocket!

But no, they are also obsessing about the possibility that Rosneft will get control of Citgo’s US refineries (which represent a whopping ~2.5 percent of US refining capacity) and its gas stations (who cares?). The refineries ain’t going anywhere, so the impact on the US market will be nil. Anything Rosneft would do in operating these refineries that could hurt the US would hurt Rosneft even more. So don’t count on it happening, and if it does, it would be another own goal that weakens Russia.

Again, the left should be experiencing schadenfreude, not panic. Rosneft lent large money to a deadbeat. It’s not going to get paid back so it is seizing assets, and will end up losing money. Playing repo man is hardly the road to riches. It just mitigates the losses from making a bad loan, and it is the bad loan that is the real story here.

But to figure that out would require actual thinking, which is not exactly the strong point of Rachel, et al. Because they have everything figured out. Trump did it! And if Trump is connected, it’s bad!

Is the Order Handling Rule Necessary to Ensure Intense Competition in Securities Markets?

A couple of weeks back Acting SEC Chairman Mike Piwowar announced a new Special Study of the Securities Markets, a reprise of the 1963 Special Study. This is an excellent idea, given that RegNMS (adopted in 2005) has (as was inevitable) spawned many unintended and unexpected consequences. Revision of this regulation in light of experience is almost certainly warranted, and any such revision should be predicated on sound scholarship, lest it be merely a Trojan Horse for vested interests arguing their books.

I wrote about RegNMS in Regulation at the time of its adoption in a piece titled “The Thirty Years War” (an allusion to the fact that the establishment of the National Market System in 1975 had sparked a continuing clash over securities market structure). Overall, I think that piece stands up well, particularly my concluding paragraph:

Therefore, the proposed rules are not the final battle in a Thirty Years War. I fully expect that in 2075, some professor will write an article about the latest clash in an ongoing Hundred Years War over securities market structure regulation.

It is certainly the case that the controversies and conflicts over market structure have continued unabated since 2005, and show no signs of letting up. (Cf. Flash Boys.) Chairman Piwowar’s call for a new Special Study is testament to that.

More specifically, the major prediction of my article has been fully borne out. I predicted that the Order Protection Rule in particular would break the network effect that resulted in the dominance of the NYSE in the securities it listed. Since RegNMS was passed, the highly concentrated listed stock market (where virtually all price discovering transactions in NYSE stocks occurred on the NYSE) has been utterly transformed, with four exchanges now splitting most of the business, with no exchange doing more than a quarter of the volume.

I further predicted that this would result in the disintermediation of traditional intermediaries–like specialists–and the substantial erosion of economic rents. This too has happened. This is best illustrated by the trajectory of Goldman’s investment in specialist firm Spear, Leeds & Kellogg. Goldman paid $5.4 billion for it in 2000 (before RegNMS) and sold it for a pittance–$30 million–in 2014. I didn’t foresee exactly the nature or identity of the new intermediaries–HFT–but I was broadly aware that there would be entry into market making, and that this would reduce trading costs and undermine incumbents with market power. Further, as I’ve written about recently, the new intermediaries don’t appear to be making rents in the new equilibrium.

The years since RegNMS have seen a dramatic decline in trading costs for investors, and it is likely the case that this decline is largely attributable to the increase in competition. Much of the controversy that has raged since 2005 relates to disputes over trading practices that were an inevitable consequence of the breaking of the NYSE near-monopoly–a process pejoratively referred to as “fragmentation.” In particular, multiple markets necessitate arbitrageurs, who effectively enforce the law of one price. The strategies and tactics arbitraguers use often appear unsavory, and strike many as unfair: arbitrageurs get something even though they appear to do nothing substantive. Moreover, arbitrage uses up real resources. That’s costly, and it would be nice if this could be avoided, but that’s unlikely ever to be so. The trade-off between much greater competition (and reduced welfare losses due to the exercise of market power) and the expenditure of real resources to enforce the law of one price seems to be a great bargain.

Much of the criticism of RegNMS relates to the Order Protection Rule, which requires that no order can be executed on market X if a better price is displayed at market Y. The critics (e.g., the Principal Traders Association which ironically represents some of the biggest beneficiaries of RegNMS) argue that this rule (a) has led to a proliferation of order types intended to ensure compliance with the rule, which make the market far more complex, and (b) requires traders to maintain connections with and monitor all trading venues displaying quotes, no matter how small.

These complaints have some merit. The crucial question is whether the equity trading marketplace will be as competitive without the Order Handling Rule as it is with it. This is an open question, and one which should be the focus of the SEC’s inquiry. For if the Order Handling Rule is a necessary condition for robust competition, the costs that the PTA and others identify are likely well worth paying in order to realize the benefits of competition.

My prediction that competition would intensify post-RegNMS was based on my analysis of the effects of the Order Handling Rule, which was in turn based on my work on liquidity network effects done in the late-90s and early-00s. Specifically, in the formal models I derived (e.g., here), the self-reinforcing liquidity effect obtains when investors decide which trading venue to submit an order to on the basis of expected execution cost (i.e., bid-ask spread, price impact). The market with the bigger fraction of trading activity typically offers the lowest execution cost. Therefore, traders submit their orders to the bigger market. This creates a self-reinforcing feedback loop (and a self-fulling prophecy) in which trading activity “tips” to a single exchange. (There are some complexities here, relating to cream skimming of uninformed order flow. See the linked paper for a discussion of that issue.)

Mandating something akin to to the order handling rule forces order flow to the market offering the best price at a particular moment, not the one that offers the best price in expectation. As I phrased it in my Regulation paper, such a rule “socializes order flow”: even if an order is directed to a particular exchange, that exchange does not control that order flow and must direct to any other exchange offering a better price.

I think that both theory and the post-RegNMS experience show that the Order Handling Rule is sufficient to break the liquidity network effect because it socializes order flow. But is it necessary? Maybe not, but it is important to try to find out before jettisoning it.

Here’s a story which suggests that the rule is not necessary in the modern electronic trading environment. One reason why traders may choose to submit orders to where they expect to get the best execution is because of search costs. In a floor-based environment in particular, it is costly to verify which market is offering the best price at any time.  Moreover, since it takes time get quotes from two floor-based markets, by the time that you actually submit your order to the one giving the best quote, the market will have moved and you won’t get the price you thought you were going to get. So economize on search costs and the risks associated with delay by submitting the order to the market that usually offers the best price. Ironically, the inevitable result of this process is that there is only one market left standing.

Search is cheaper and faster–and arguably far cheaper and far faster–in the modern electronic environment. Based on feeds from multiple markets, an electronic trader (and in particular an automated trader) can rapidly compare quotes and send an order to the market offering the best quote, or by viewing depth (something pretty much impossible in the floor days, where much of the liquidity was in the hands of floor brokers) split an order among multiple venues to tap the liquidity in all of them.

In other words, the natural monopoly problem was far more likely in a floor-based environment where pre-trade transparency was so limited that search costs were very high: it was nigh on impossible to know precisely what trading opportunities were or to move fast enough to exploit the one that appeared best at any point in time, so traders submitted their orders to where they expected the opportunities to be the best. In contrast, electronification and automation have created such great pre-trade transparency and the ability to act on it that it is plausibly true that in this environment traders can and will submit their orders to whatever venue is offering the best trading opportunity at a point in time, regardless of whether it usually does so. In this story, technology eliminates the uncertainty and guesswork that created the liquidity network effect.

Maybe. Perhaps even likely. But I can’t be certain. Note that one complaint about the existing market structure is that even though everything has vastly speeded up, some traders are still faster than others. As a result, those who submit a market order in response to seeing a particular displayed price are often dismayed to learn that the market has moved before their order actually reaches the trading venue, and that their order is executed at a worse price than they had anticipated. Freed of the obligations of the Order Handling Rule, these traders may choose to submit their order to where they usually get the best price: if enough do this, the liquidity network effect will reemerge.

Further, the PTA and others have complained that it is costly to monitor and maintain connections with all trading venues as is necessary under the Order Handling Rule. If the Rule is relaxed or eliminated, one would expect that they will disconnect from some venues. If enough do this, the smaller venues will become unviable. After this happens, there will be fewer venues–and some traders may choose to disconnect from the smallest remaining one. This dynamic could result in another feedback loop that results in the survival of a single dominant exchange that exercises market power.

It is therefore not clear to me that elimination of the Order Handling Rule will result in traders having their cake (intense inter-exchange competition) and eating it too (less complexity, lower connection cost). Given the substantial benefits of greater competition that have been realized in the past dozen years, changes to the cornerstone of RegNMS should not be taken lightly. The Special Study, and the SEC, should pay close attention to how competition will evolve if the Order Handling Rule is eliminated. This analysis should take into account the existing technology, but also try to think of how technology will change in the aftermath of an elimination and how this technological change will affect competition.

Most importantly, any analysis must be predicated on an understanding that there are strong centripetal forces in securities trading. Any time traders have an incentive to direct order flow to the venue that is expected to offer the best price, the likely outcome is that only one venue will survive. The incentives of traders in a high speed, largely automated, and electronic market in the absence of an Order Handling Rule need to be considered carefully. It should not be assumed that technology alone will eliminate the incentive to direct orders to the market that is usually best, not the one that is best at any particular instant. This hypothesis should be probed vigorously and skeptically.

Experience in futures markets suggests that liquidity network effects can persist even in high speed, automated, electronic markets: futures contracts in a particular instrument exhibit a strong natural monopoly tendency, and strong tendencies towards tipping. It is arguable that the vertical integration of clearing, and the resulting non-fungibility of otherwise identical contracts traded on different venues, could contribute to this (though I am skeptical about that). But it could also mean that something like the Order Handling Rule (which is not present in futures markets) is necessary to create strong competition between multiple venues even in a highly computerized and automated trading environment.

This is the big issue in any revamping of RegNMS. It should be front and center of any analysis, including in the impending Special Study. The intense competition in the post-RegNMS world is a remarkable achievement, particularly in comparison with the near monopolistic market structure that existed before 2005. It would be a great shame if this were thrown away due to an incomplete analysis of what competition in a modern computerized market would be like in the absence of something like the Order Handing Rule.

SWP Climbs The Hill

I have become a regular contributor to The Hill. My inaugural column on the regulation of spoofing is here. The argument in a nutshell is that: (a) spoofing involves large numbers of cancellations, but so do legitimate market making strategies, so there is a risk that aggressive policing of spoofing will wrongly penalize market makers, thereby raising the costs of supplying liquidity; (b) the price impacts of spoofing are very, very small, and transitory; (c) enforcement authorities sometimes fail to pursue manipulations that have far larger price impacts; therefore (d) a focus on spoofing is a misdirection of scarce enforcement resources.

My contributions will focus on finance and regulatory issues. So those looking for my trenchant political commentary will have to keep coming here

Down the Syrian Rabbit Hole

The Syria story has many threads. I’ll address a few of them here.

First, to follow on Ex-Regulator’s comment: Trump’s initial public justification for the strike–the humanitarian impulse stirred by pictures of dying children–is deeply troubling. Sentimentality is a poor basis for policy. In particular, it has no limiting principle. If you take a tragic view of humanity–if you view mankind as fallen and flawed–you know that there is a virtually unending supply of sad, heartbreaking, stories. So how does a president choose which appeal to answer? And how do people know which appeals he will answer? Truth is, we have no idea. The line will be arbitrary, which leads to unpredictable, inconsistent policy.

Further, as Ex-Reg notes, by emphasizing his susceptibility to sentimentality, Trump makes himself a target for manipulation. These manipulations are likely to include false flags whereby those attempting to get the US to intervene on their side create an outrage to pin on their opponents: it cannot be precluded that this occurred in Syria last week.

Second, in subsequent remarks by others than Trump, the administration has downplayed the humanitarian aspect, and emphasized the signaling motivation. Moreover, it has explicitly stated that the signal was not directed at Assad alone, or even Putin and Assad, but also at Kim Jung Un and the Chinese.

My concern here is the Rolling Thunder problem: the signal that you think you are sending through a limited use of force is not necessarily the signal that your intended audience hears. What happened in Vietnam during the Johnson years was that graduated escalation was interpreted by Ho Chi Minh et al as weakness, and as an unwillingness to take decisive action. Assad or Kim Jung Rolly Poly may conclude that they can easily absorb a strike like the one launched Thursday night, and that Trump may not be willing to go much further. Or, they may conclude that (a) this strike was so modest, (b) Trump is likely to engage in graduated escalation if he escalates at all, and (c) they can absorb much heavier blows. Either way, they could be encouraged, rather than deterred.

Lesson from Vietnam (pun intended): if you want to achieve a decisive outcome, Linebacker trumps Rolling Thunder.

Of course, one reason for Johnson’s reticence in Vietnam was the risk of drawing in the USSR or China. That’s obviously an issue in Syria and North Korea. But if that is the real concern, don’t even start down the road with a limited strike. If you do, eventually you will pull up short and look feckless.

Third, the administration is sending extremely mixed signals. Last week, Tillerson said point blank that regime change was not on the administration’s agenda. This morning, Nikki Haley intimated that it is. Given that no matter how horrid the Assad regime any successor is likely to be as bad or worse, that regime change is even on the table is highly disturbing.

Fourth, assessing whether the chemical attack was a false flag or a regime attack requires an evaluation of the plausibility that Assad would do such a thing. As Dearieme and Ex-Reg note, and as I noted initially, it does not seem rational for Assad to have taken this action. It certainly was not a military necessity. But people like Assad think differently, and there may be some Machiavellian reason for him to take this action.

One is that he, like everyone else, is trying to fathom Trump’s policy, and Trump himself. Therefore, Assad ran a calculated risk to see how Trump would respond to a pretty extreme provocation. As suggested above, he might be pleased with the answer (contrary to DC conventional wisdom).

Another is that he needed to bind Russia and Iran closer to him. Again running a calculated risk that they would stand with him rather than abandon him (for that would call into question their previous policy of support), he launched this attack and forced them to be complicit in a very inflammatory war crime.

Relatedly, one of Assad’s big fears has to be a rapprochement between Russia and the US that would make him expendable. The Russians had guaranteed that he had eliminated chemical weapons. That guarantee is now shown to be inoperative, either due to (as Tillerson said) deliberate deception or incompetence. Regardless, now no deal with the Russians regarding Assad can be considered credible. This reduces the risk that the Russians will be able to cut a deal with Trump that makes Assad expendable.

I have no idea whether these possibilities are realities. I just put them out there to highlight that there can be twisted motives that cause people like Assad to take actions that seem to be against their interest–just as there can be twisted motives for jihadis to kill their own in horrible ways.

Fifth, Occam’s Razor would say that Trump’s attack completely undercuts the narrative that he is Putin’s bitch. But Occam’s Razor is an alien concept in the fever swamps of the left. The certifiably insane (Louise Mensch) and the hyper partisan but supposedly sane (Lawrence O’Donnell, Chris Matthews) certain have never shaved with it. They are claiming that this proves Trump is Putin’s bitch! The “reasoning”? He is doing it because the most likely interpretation is that it shows that Trump isn’t Putin’s bitch, so that means that he is! Or something.

In other words, this lot interprets everything that Trump does as evidence of his collusion with the Russians. This means that the hypothesis that he is in collusion with Putin is unfalsifiable, and hence is junk reasoning. It should therefore be rejected, as should anything that those who espouse this theory say.

Lastly, the attack is a complete embarrassment to the Obama administration, which preened and bragged that it had rid the Assad regime of chemical weapons. All of the administration weasels–Susan Rice, Ben Rhodes, Colin Kahl among them–have been quick to defend the administration. Although Obama remains silent, their voices were joined by the next most authoritative one–John Kerry–who ranted against the airstrike. He claimed that the Obama administration had accomplished MUCH more without firing so much as a shot, and that Trump’s attack will undermine all of the great progress that had been achieved.

But watch the weasels’ weasel words. They all say that the 2013 agreement eliminated all of Assad’s declared chemical weapons. Um, the criticism of the deal all along was that Assad might have undeclared stocks, and hence might retain a chemical capability despite the deal. It is beyond embarrassing that these people would protest so stridently that their deal was great in the face of an event which most likely shows that it was a complete, and completely predictable, sham.

So is Kerry’s outraged response to the Tomahawk Chop delusional? Chutzpah? I’m going with delusional chutzpah.

It’s almost tax time. So I suggest that you implement the following strategy, and cite the authority of John Kerry as justification. Report 50 percent of your actual income on your 2016 1040. When the IRS comes after you, tell them–in high dudgeon: How dare you! I paid all I owed on my DECLARED income! Good luck! I’ll write you in jail!

The alternative explanation for the chemical attack–a false flag–hardly provides any cover for Obama and the Obamaites because that would mean that the chemical attack was launched by opposition forces that the administration supported. So, either the administration entered into a farcical deal, and was played the fool by Assad, or it was played the fool by anti-Assad forces whom it had supported.

People with any decency would don sackcloth and ashes and plead forgiveness. But we are talking about the Obama administration, so  . . .

Perhaps there will be more clarity on all these issues in coming days and weeks. But I kind of doubt it. Any venture into understanding Syria is a trip down the rabbit hole. And given the depravity of all the actors involved, that’s yet further reason to stay as far away from this mess as is humanly possible.