back to article Hey, Sand Hill Exchange. Shouting 'blockchain!' won't stop the Feds

Matt Levine tells us the story of the Sand Hill Bitcoin Exchange, another one of those bright ideas that turned out not to be so bright and ended in a $20,000 fine from the SEC. The real underlying point is that it really was a bright idea: one that would improve the economy by making the valuations of large pre-IPO tech …

  1. tim 13

    Terry Pratchet had it right

    http://wiki.lspace.org/mediawiki/Pork_Futures_Warehouse

  2. Jason Hindle

    Who stands to gain from such an Exchange being created?

    Who stands to lose? Of the two, who is in the stronger position? If you follow the money, where does it lead?

    1. I ain't Spartacus Gold badge

      Re: Who stands to gain from such an Exchange being created?

      There would be a theortical advantage to having a more complex housing market. The ability to hedge against risk. To be honest it would be such a complex financial package that the banks would be bound to mis-sell it, causing endless headaches, refunds and fines a decade later.

      But let's say you could buy a negative equity protection mortgage. You might pay an insurance premium each month on your mortgage - or it could even be free. Then when you came to sell up, you would be protected against a market crash and get some agreed amount that was more than enough to pay off the original mortgage. But if you sell when the markets risen, you'd lose a percentage of the profit you made.

      This would arguably be very good for ordinary people, who need a house to live in, not as an investment. So although they risk losing out on some profit, should they lose their job, or have to move at short notice, wouldn't get screwed if that happened to occur in the 2-3 in 20 years when that happens to be a financially disastrous decision, as prices just happen to have temporarily collapsed in their area.

      This market would allow people to go short or long on the insurance costs - so the price of the insurance would be a proxy for housing market sentiment.

      It is the sort of thing that the financial markets are actually really good at. Some people and companies are busy doing real things and might not want risk in their lives or businesses. Others have money to invest, and want profits. So they can use their cash (via derivatives and insurance) to make a profit from the unwanted risk of the other parties. Meanwhile thess guys lose some of thier profit in the good times, but also are insulated against losses in the bad. Hence farmers might sell their crops way ahead of harvest, because it's a choice of a guaranteed price that protects them from going bankrupt, or the possibilty of bumper profits, if there's a shortage come harvvest time.

      1. jonathanb Silver badge

        Re: Who stands to gain from such an Exchange being created?

        The problem is that while there almost certainly would be a market for products based on for example the Halifax house price index, there would be for a product based on the price of your house. That is made of of several components. The general market condition as reflected by the index is one of those. Then there are regional and local factors, based on changes in local facilities and pollution sources, and factors specific to your house, such as its state of repair, and any improvements you make to it.

    2. Robert Carnegie Silver badge

      Re: Who stands to gain from such an Exchange being created?

      It seems that people who can bet on this exchange going bust benefit from its creation, but that may not be legal either.

      Anyway, to most of us it seems that "information" within a stock market is mostly imaginary. Particularly day-traders who hope to read the economic future in the rather random previous daily fluctuation of a price, having been put there by collective activity of people who don't know any more than you do.

      Also, does anyone else recall hearing about at least one small enterprise which was shorted to death or nearly so by a powerful speculator - an actual wealth creator crushed by the great money casino? I think it was either in the IT sector or maybe pool noodles or a new kind of table fork, I don't quite remember. But a boon to humanity nevertheless, wasted.

  3. Steve Knox

    Yes, but...

    can you short cat pictures?

    1. Jason Hindle

      Re: Yes, but...

      I don't think cat pictures fit within any of the various theories and laws of economics. Except perhaps Grumpy Cat.

      1. Mayhem

        Re: Yes, but...

        What about if you post pictures of short cats?

        1. Fibbles

          Re: Yes, but...

          I don't see why not. People have been posting pictures of longcat for years.

          1. Lyndon Hills 1

            Re: Yes, but...

            Is that like longpig?

            1. Adam 1 Silver badge

              Re: Yes, but...

              Not like endlesshorse though.

  4. David Roberts Silver badge

    Not comparable?

    Shares are just that - loads of people have a small share in an enterprise.

    For housing I can see this being workable for a commercial company owning rental property, and thus sharing in the risk and profit from capital gain/loss and rise/fall in rental income.

    You could then bet on rents and property prices going up or down (plus the efficiency of the company in managing housing stocks) just like any other corporate enterprise.

    However much of the UK domestic property is held privately by individuals so is not comparable in any way that I can see to short term betting on stock price movements. This may well be the thrust of the argument but to me it does not seem a practical comparison.

    I think that the argument is also flawed where it says that an individual cannot go short. It isn't short term in a comparable way to current market trading, but over a longer cycle selling your house, banking the money, and going into rented property is a method of going short. Look at discussions predicting a market crash in house prices. One option is always to sell up and wait for the crash then buy at a lower price, which is surely betting on a price fall.

    However I suppose this is more akin to taking your money out of the stock market into cash (or at one time bonds) and buying stocks again after the fall. So, yes, the modern method of simplifying this by allowing you to bet with money you don't have instead of buying and selling stocks doesn't have a comparable mechanism for domestic housing.

    The other issue I have with the whole concept is the difference between commiting to buy or sell100 shares in a company (all identical, tradeable in seconds and available from a vast pool) which you don't currently own and commiting to buy or sell a house (each one unique and tradeable in a matter of months if you are lucky) which you don't currently own.

    So you can't short the housing market.

    Should you be able to (and if so, how) or is the housing market being used as an example of something where there is no short term financial mechanism (apart from interest rate control) to force prices down?

    Still can't see how this is comparable with betting on stock valuations.

  5. John Mangan

    Regulations. . .

    Interesting argument and certainly one I hadn't considered before.

    But if regulation is bad -> it slows/inhibits/ innovation <- then no regulation must be good -> but that allows fraud <- so regulation must be good.

    It leads to the really vexing question of how you have correct/sufficient regulation to stop criminals making us all destitute (and eventually killing the golden goose/economy) but not stopping beneficial innovation.

    Now, if you can answer that, that would be a fascinating column!

    1. Kanhef

      Re: Regulations. . .

      I think Sand Hill's approach was much like Uber et al.: try something new, ignore relevant regulations by claiming they don’t apply to what you're doing, and hope that by the time people decide the regulations do, in fact, apply, you're too successful to be shut down easily. A more cautious approach would have been to start by going to the regulators and trying to get a change in rules, or an exemption for what you want to do. Having Nobel-prize-winning economists saying it would help stabilize markets and prevent bubbles would certainly help with that.

      1. John Mangan

        Re: Regulations. . .

        I presume the 'cautious approach' is what ends up with you losing first-mover advantage - and waiting for the regulators to decide to allow something new (together with the inevitable information leakage to potential competitors) probably gets that stuck in the box labelled "a mug's game".

      2. J.G.Harston Silver badge

        Re: Regulations. . .

        "I think Sand Hill's approach was much like Uber et al.: try something new, ignore relevant regulations by claiming they don’t apply to what you're doing"

        When I was dealing with taxi licensing we tried to encourage innovationm but the trade tended to kill it. Example: somebody said rickshaw taxis might be a good idea, we said: they're people-powered so we can set up a fast-track vehicle safety inspection that skips all the internal combusion engine stuff, etc., but the response of potential rickshaw taxi drivers was "we don't need to comply with no steeeking license!" so the innovation died. We tried to encourage the trade to set up a coordinated remote pre-booking system, but they wouldn't stop their pissing contests to realise what advantages it would have, until Uber was on the horizon, and overnight the trade set up a coordinated remote booking system, along with a splurge of mergers and rationalisations that's killed off a lot of the internal cat fighting.

    2. Tim Worstal

      Re: Regulations. . .

      If I could answer that properly then I'd be in Stockholm getting my fake Nobel.....

  6. Graham Marsden

    "there's no way of selling a house you don't own to speculate on falling house prices"

    No, but I can do you a very good deal on this bridge...

    PS of course, to be serious, thank fuck there's no way of speculating on house prices like this, otherwise things would get even more ridiculous than they are at the moment!

  7. User McUser
    WTF?

    Wait, what?

    But because they're private companies there's no way of being short them. Yes, you can clamour to be allowed to invest in them, pushing prices upwards. You can stay out of the market entirely, meaning you're not pushing up prices. But you can't speculate that they're over-priced and thus contribute to the correction of that possible over-valuation.

    This sounds like utter nonsense to me... A private company's "valuation" is pure fiction - until there are actual shares you can buy and sell you might as well be talking about the price of Unicorn farts.

    Say some economic speculator decides that Uber's pre-IPO value is twice that of the previous valuation. What real-world change does this trigger? And suppose another expert says it's actually only worth half of the original valuation; is the latter right and the former wrong? Or is the whole thing just speculation and meaningless guesswork until the stock goes on sale and we find out the real answer? And what if the company just stays private forever, what do you do then?

    I've not often been flabbergasted by economic theory before but this one makes my brain hurt.

    1. Anonymous Coward
      Anonymous Coward

      Re: Wait, what?

      Agreed. Read this part

      Note that the argument isn't that they are over-priced. Rather, the arguments goes that that if they are overpriced, we've no mechanism by which those who think so can interact in the market and reveal what they think, thereby triggering a price correction.

      Surely the ability to price correct relies on fungibility and arbitrage. You cannot put downward pressure on an invitation only long price by going hell for leather against an artificial non-fungible short price.

      That's why, when they IPO, their price normally collapses.

  8. G Mac

    Be careful what you wish for...

    Prior to the GFC, financial companies were asking for more leeway with shorting on equities - or more to the point, that the SEC give them free reign of the requirement to not 'cover' the short within 3 days. Of course, there were oodles of failure to do this but the toothless SEC wasn't holding anybody accountable. So the banks wanted it more officially relaxed and ignored.

    Note that the requirement to cover the short makes sense in the fact that infinite selling of something you don't have and won't deliver is a great way to push a price to zero, so having the requirement to cover the short should not be onerous, at least for the 'honest' shorters.

    Amusingly, when the shit hit the fan *during* the GFC those same financial companies begged the SEC to ban shorting of their stocks for the crisis (http://www.nytimes.com/2008/09/20/business/20sec.html).

    It seems that sauce for the goose is not sauce for the gander. And one would of expected that price discovery, made so laudable in this article, during the crisis would of been exactly what was wanted. Oh, wait... the same rules don't apply for Wall Street/The City as for the rest of us.

    Maybe that should be mentioned in the article. But of course it won't be because it's point was regulation was the problem, while in fact not enforcing it for all players (including Main Street) is more an issue. The *last* thing financial firms want is price discovery. Which is never mentioned by economists (in much the same way that the F for fraud word is never mentioned - it is gospel that it cannot happen).

  9. Stratman

    "there's no way of selling a house you don't own to speculate on falling house prices"

    Can somebody explain why this is a real-world problem for normal people?

    1. gerdesj Silver badge

      Re: "there's no way of selling a house you don't own to speculate on falling house prices"

      "Can somebody explain why this is a real-world problem for normal people?"

      Nope, you've stumbled into a discussion of economic theory that has already had unicorn shit, sorry - farts - invoked. At that point most of us must give up hope.

    2. I ain't Spartacus Gold badge

      Re: "there's no way of selling a house you don't own to speculate on falling house prices"

      Can somebody explain why this is a real-world problem for normal people?

      Normal people buy houses. Normal people struggle to price them, because they're not permanent members of the housing market (they only get involved when it comes time to move). This means that houses may often be mis-priced. So people may be paying too much or too little. Given it's the single biggest financial transaction (and committment) of our lives, it would be better if we got it right.

      Also, a market that suffers from continual upward pressure, with limited price moderating tools is going to be more prone to bubbles and then sudden collapses, which means people get stuck in negative equity and have their financial lives ruined for years/decades.

      We know the market doesn't operate too well. So then we start to try and use economic tools to look at it, and see if it teaches us anything useful.

    3. Alfred

      "Can somebody explain why this is a real-world problem for normal people?"

      Because normal people have to pay enormous prices for a house to live in during a bubble, and then suffer negative equity when it pops. What's proposed would be a way to damp the bubbles.

      1. G Mac

        Re: "Can somebody explain why this is a real-world problem for normal people?"

        Which why folks rely on 'experts', in much the same way you go to mechanics, doctors, accountants etc. In this case, they go to appraisers.

        Of course, that relies on appraisers being something called 'honest', which doesn't generally appear when economists speak (because they also don't know how to pronounce 'fraud').

        For example, a petition by 11,000 appraisers (collected from 2000-2007) was being collected and finally submitted during this 'mysterious' bubble period. See this in 2001:

        http://www.nytimes.com/2001/09/02/realestate/appraisers-and-the-pressure-to-inflate-valuations.html

        Essentially, honest appraisers were being pressured by lenders (not buyers) to inflate prices. If they didn't, they were black listed - you can see an example here:

        http://www.seattlepi.com/business/article/Real-estate-appraiser-sues-WaMu-1261946.php

        Of course, lenders/banks denied this. Any attempt to stop it was stymied. Any attempt by a US state (I think it was Virginia - one of those around there) to institute their controls on predatory lending was overruled (Bush, after being lobbied by banks etc.) and so the bubble went on.

        This was not rocket science to stop. But the gravy train was paying off big time for loan officers and the C-suiters. When the Greenspan (Chairman of the Federal Reserve), a big believer that there is no such thing as 'fraud' failed to do enforcement (aka, regulation), being of the Chicago School of economics where fraud is sorted out by the market, things turned out as expect.

        Of course, Greenspan after the GFC was 'shocked, shocked, that there is gambling in this establishment', but by then it was all over bar the shouting. See here http://business.time.com/2008/10/23/alan_greenspan_changes_his_min/.

        1. Robert Carnegie Silver badge

          Property valuation

          Of course a property valuer may believe that prices are let's say twice what they would be in a sane society, while expecting this to continue to be the case indefinitely. Furthermore, if prices do drop, home-owning voters start screaming.

          A valuer really predicts what other people will offer for a property. Sanity doesn't come into it directly; how much you yourself like the property does, for instance, if it's near to your job. Bid low if you don't especially like it, and if you win, cheer yourself up with the money you saved. Bid high if you like it a lot.

  10. VeganVegan

    Generalizing 'market'

    A 'market' need not be confined to financial system per se. One could use market forces to deduce/summarize the sentiments of the crowd; crowd-sourcing is one new terminology for this.

    The University of Iowa has run a health prediction market for some time now, quite successfully, it appears. http://fluprediction.uiowa.edu/fluhome/index.html

    The market is set up just like a stock exchange. They use a virtual currency for the markets, and at the end of the exercise, the virtual money is converted to real money, as an incentive for people to participate, and to participate more or less honestly insofar as their opinions go.

    I participated in one of the earlier ones they ran, on the likelihood of a H5N1 pandemic. Made a reasonable amount of money, & donated it to ProMed Mail.

    1. Tim Worstal

      Re: Generalizing 'market'

      The Iowa market, yes. But the reason they don't run such markets in financial things is because....SEC regulation.

      1. Beridhren the Wise

        Re: Generalizing 'market'

        Tim, here in the USA there is a political party that wants to do away with all regulation for the reasons you state, i.e. they stymie innovation and reduce freedom. However reducing regulation increases risk for everyone, for example if you reduce regulation on how homes should be built then after buying a new house your roof might fall in and kill you, which I think we all can agree would be a "bad thing".

        The way the Libertarians answer this concern is that if your roof falls in you (or more accurately your heirs) can sue the manufacturer of your home, and the cost of losing a lawsuit will motivate the manufacturer of your home to do it right. The problem is that while your heirs would get a nice sum of money, you are still dead, so the thought is that prevention is better than cure, hence regulation and inspection of new homes before they are granted occupancy permits.

        And the same is true of all industries that face regulation, it is government following a policy that prevention is better than cure, something I personally agree with, but it is also the nature of governments to reach for ever more power so if we are not careful we end up with regulation that protects incumbents (the financial sector is a prime example) because as you state the regulation creates high barriers to entry, which is also a “bad thing”.

        So regulation is a balancing act, too little and real people get hurt, too much and freedom is unnecessarily curtailed. So as with other aspects of a government that rules with the consent of the governed, we must be ever watchful of overreach, and curtail government power when it occurs.

        1. Orv Silver badge

          Re: Generalizing 'market'

          The other problem with lawsuits as a deterrent is the risk of bringing one is related to how much money you have -- a homeowner with a defective home probably can't afford to litigate against a large company, and faces potential financial ruin if they lose and are counter-sued for attorney costs.

          Add in that many Libertarians would also like to see the *courts* privatized and it mostly sounds like a free pass for corporations, to me.

  11. Sirius Lee

    It is true that the lack of a mechanism to correct all prices can lead to unicorns. But the overall effect of those missing corrections is to stoke inflation. A lot of inflation is bad but a little inflation is good. It allows us to make large (by personal standards) capital purchases today the debt of which is eroded over time. Deflation, on the other hand has few upsides. Sure, things might get cheaper but since they will be even cheaper in the future a buyer may as well wait. And wait. Until in the worst case scenario there is no economic activity. In other words the lack of a correction mechanism for some products leads to inflation which gives buyers the confidence they need to invest which makes the world go around.

    So I'm not sure that an ability to short all products, such as houses, is a good idea. Yes, it may prevent some bubbles, but it will also limit any capital gain and will reduce inflation. Both means the average Joe is stuck with the debt for much longer reducing the likelihood that capital purchases will occur. The overall effect will be to dampen and impoverish the economy, not enrich it.

    1. Anonymous Coward
      Anonymous Coward

      So wouldn't the best market be a chaotic one that motivates people to move in both directions? Constant deflation would hurt, but if the course can flip at any time, some will commit sooner, preventing stagnation.

    2. I ain't Spartacus Gold badge

      Sirius Lee,

      A stable housing market is a good thing. It's not a bloody investment, it's a place to live! This is important. The reason to buy is that you're hoping to have paid the mortgage off before you retire, and that's better than renting for your entire life. You also get to make whatever improvements you want to a house you own, which might not be considered worthwhile by a landlord.

      Making loads of money on a house might make you feel good, and that you've got an asset to spend against, but if every other house goes up as well, it's only a gain if you cash it in at retirement, and downsize. And if houses were cheaper, you wouldn't have been spending that cash on the mortgage anyway, so you could have put it into your pension.

      The other thing wild rises cause is the huge amount of buy-to-let investors. I've no problem with people who want to be landlords, but they should be making their money by charging rent, not hoping to keep on mortgaging to buy more property then using the growth in value as security for more mortgages, thus causing a huge runaway housing bubble, and subsequent crash. Which incidentally bankrupts them, and takes out a bunch of the banks that lent to them.

      As you say though, deflation is even worse.

  12. Cogs and Ink

    Questions for TW

    As Tim seems to enjoy answering curious commentards (and as I enjoy reading the answers), I thought I'd ask the obvious questions:

    1) What is the mechanism by which shorting something creates a downward pressure on its price? Is it just that the market gets scared when people start shorting? Or is there something else? I can understand how people going long on housing can drive up prices by reducing the available supply, but that doesn't seem to work in reverse.

    2) If one wanted to create the kind of house-price exchange you describe, sans the blockchain hand-waving and within the current legal and regulatory framework in the UK, how could one do it? Does the current regulation impose a blanket ban on all new exchanges?

    1. Tim Worstal

      Re: Questions for TW

      1) Two things. Firstly, purely sentiment, as you intuit. The more short pressure there is the more people think about going long. But also, markets do tend to connect. Because people will arbitrage between different versions of he same market (say, in a commodity, between physical, futures and options). So if there's more people going short in one section then that's going to get covered in another section and thus put proper downward pressure on prices. Wouldn't be all that efficient in he housing market, that second, but it would be there,.

      2) The UK would be much easier to set this up than the US. FSA etc would allow Liffe (or whoever) to set up a new contract, no problems. You could base it on the Halifax index for example. Setting up a new exchange to do it would probably be contra-indicated. It would be howlingly difficult to get the volume of trade you'd like. But give the extant speculators something else to speculate in on a market they already use and it should work.

  13. BobRocket

    Winners and losers

    House prices are defined by the amount the lenders are prepared to lend and mitigated by the default risk of the borrowers.

    Shorting property (or just the Halifax index) is effectively illegal because the lenders make the rules.

    House prices are the modern day South Sea Bubble, when it pops (and this is a mathematical certainty) it will trigger bankruptcies amongst those who had bought on credit, the lenders will grab the assets and proceed to pump up another one.

    If you don't know who the mark is...

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