Streetwise Professor

I just read Haim Bodek’s “The Problem of HFT.”  It reinforced my belief in what I’d long concluded, namely, that the problematic aspects of HFT result from the decision of the SEC to create a Simulacrum Limit Order Book-a SLOB-rather than a true Central Limit Order Book-a CLOB-when it promulgated RegNMS.  As I noted at the time, the SEC chose an “information and linkages” approach to create a National Market System that consisted of interconnected competing exchanges, rather than to create a single CLOB.  In achieving competition, it was hugely successful.  Whereas NYSE dominated trading in its listings pre-RegNMS (with a market share in the low-to-mid 80s), now executions are divided rather equally among a handful of exchanges.  There are few rents in securities execution in the US anymore, in contrast to the old floor days.  NYSE’s equity business contributed relatively little to the price paid by ICE for NYSEuronextLiffe.

Part of the decision to  was political economy: politically, the SEC couldn’t have realistically favored one venue, or displaced existing exchanges by creating a new national CLOB.  Part of this decision was predicated on a defensible and understandable desire to encourage competition in securities trading, in fees, rules, liquidity, and technology.  However, the SEC didn’t anticipate how the market structure would evolve, and in particular, how HFT would transform securities trading.  I can’t say that anybody did.  I certainly didn’t.  I thought that automated trading would link markets, but I didn’t see it playing out like it did.

I call what the SEC wrought a “simulacrum” order book because although it incorporates some aspects of a central limit order book, specifically price priority across exchanges for the top of book, it lacks several crucial features of a true CLOB.  Price priority is for top of book only.  Time priority (or other secondary priorities) are not enforced across trading venues.  Markets can cross or lock-which can’t happen in a CLOB, where locked or crossed orders execute automatically.  Moreover, latencies, particularly in the public feed of the NBBO create behaviors and incentives that diverge from a CLOB.

Because it links multiple execution venues, the SLOB has many seams.  And one thing we know is that traders traders look for and exploit seams like Tom Brady looks for and exploits the seams in a zone defense.  Bodek’s little collection of essays goes into considerable detail on how traders have worked the seams, and how their methods have changes in the last 6 years.

The most critical seam in the SLOB, in Bodek’s accounting, is the rule on locked and crossed markets.  The SEC rules state that an order on exchange A that locks or crosses an order on exchange B cannot be displayed.  This complicated the task of quoting aggressively: an HFT that submitted an order that locked or crossed a market would not be able to establish position at the head of the queue.  To address this, traders first used spam and cancel: repeatedly sending orders that were canceled if they locked or crossed, but which would go to the front of the queue as soon as the quote in the away market changed.  Exchanges had implemented algorithms that re-priced orders that locked or crossed away markets, and put them at the end of the price queue.  HFTs circumvented this using hidden order types that were not displayed if they locked or crossed, but which were displayed-and crucially went to the head of the queue at the new price-the instant their price would no longer lock or cross an away market.  HFTs also used sweep orders to establish priority.

The common features behind all of the things Bodek criticizes are that (a) they are all intended to establish priority, and facilitate aggressive quoting, and (b) they can happen in a SLOB, but not a CLOB.  They give an advantage to HFT firms that invest in the technology and in understanding the order types, to the detriment of those who don’t (including many institutional investors): this is Bodek’s main beef.  They are an artifact of the prohibition on locks and crosses, and this can only occur in a fragmented market structure that precludes locks and crosses.  If locking and crossing orders were matched against one another and executed, as would happen in a true CLOB, much of the gaming of order types Bodek laments would go away: I suspect, however, that latencies across a system of linked exchanges would make this impractical.

This relates to, and complicates, points I made in my writing on exchange competition in the late-90s and early-00s.  Competition between privately operating CLOBs with no obligation to route orders to markets displaying better prices is likely to result in the survival of a single dominant platform that exercises market power.  This is arguably the case in futures markets.  A CLOB utility that is regulated to mitigate this market power problem raises myriad difficulties.  Who will operate it?  How will rates be regulated?  How will access be regulated?  (One way to exercise market power is to limit access to the CLOB.)  How will the CLOB utility be governed?  How is capture (by major intermediaries, for instance) to be avoided?  How can the CLOB be incentivized to be technologically innovative, rather than a lazy monopolist (especially since some technological changes may be very disruptive to the business models of important market participants)?

Socializing order flows by requiring exchanges to route orders to other markets displaying better prices encourages competition, and seemingly avoids the problems posed by private CLOBs and utility CLOBs, but raises its own difficulties.  Indeed, these are the problems that we are experiencing today, and which Bodek identifies.  This raises the question: can we clean up SLOBs so they are more truly CLOB-like, while retaining interexchange competition that mitigates market power problems?  The answer to this question has both technological and political components.   A system of linked exchanges necessarily has seams and latencies and inter-market coordination issues absent in a true CLOB, and these are vulnerable to gaming and breakdown, and even during normal operation represent a more complicated and error-prone way of allowing all orders to interact with one another than a true CLOB.  The political components arise from the fact that interested parties, most notably exchanges, major sell side intermediaries, and big buy side institutions, will strive to shape the system’s design and rules to advance their interests.

The trade off is therefore pretty stark: it’s a pick-your-poison kind of thing.  Don’t socialize order flow and live with market power, or socialize order flow to facilitate competition, and grapple with the technological challenges of creating a virtual CLOB, and fighting the never ending battle against attempts to exploit the seams.  I don’t claim to know the right choice, but I think that framing the issues in this way will permit far more constructive debate than the one currently ongoing.  This debate has become Manichean: good vs. evil: black hats vs. white hats.  It is oddly ahistorical, in its failure to recognize the problems with the previous system.

Perfect is not an option here.  Which is why debates over securities and derivatives market structure have been raging for as long as securities and futures have been traded.  The debate would be more productive-less sterile-if the choices were framed more clearly.  I’ll keep trying.

Richard Epstein has written about “government by waiver,” and its pernicious effects.  We’ve had numerous examples of late, from the Obamacare waivers, to the suspension of the employer mandate, to yesterday’s decision to exempt Congressional staff from Obamacare.  Yesterday also brought news of another administrative version of Emily Litella’s (and Nirvana’s!) “Nevermind”: the EPA is easing renewable fuel standards that had wreaked havoc in the gasoline market, and driven prices for Renewable Information Numbers “RINs” from pennies to nearly a dollar per gallon:

The Environmental Protection Agency, which administers the mandate, has said it will reduce total required volumes in its forthcoming proposal for 2014. It also extended the compliance deadline for 2013 by four months to June 30 of next year.

We’ve seen this movie before.  Congress passes expansive feel-good legislation that is at complete odds with economic reality.  Those who have to deal with economic reality importune the executive branch and administrative agencies for relief, and some sort of relief is granted.  (As another example, CFTC has also granted various forms of relief for some of the Frankendodd craziness.)

In the case of RINs, Congress demanded that refiners utilize far more renewable fuels (such as ethanol) than is feasible, given the installed base of auto engines which can only utilize 10 percent ethanol fuels.  Refiners could purchase unused renewable fuel credits (RINs) accumulated in past years when renewables usage exceed the then-lower mandated levels, but these are running out, and the renewable requirement was increasing even more for 2014.  Thus, the price of RINs had rocketed higher and there was risk that there wouldn’t be near enough for 2014.  The regulations also favored exports of gasoline because exported gas does not count towards renewables requirements.

So EPA stepped in and gave relief.  Because Congress couldn’t be bothered to worry its little head about minor details like the ability of the engines in hundreds of millions of autos to use the amount of ethanol it, in its infinite wisdom, decreed.

This is perverse in many ways.  It encourages rent seeking, at times to the point of corruption, or at least highly dubious political favoritism and dealing.  It empowers unelected bureaucrats who are difficult enough to hold accountable as it is, and who are often pursuing ideological agendas, and who can use their leverage to advance those agendas.  It allows Congress to avoid being held responsible for, let alone accountable for, its careless legislating: why take care in attempting to anticipate perverse effects when there’s someone there to clean up your mess?  It creates substantial uncertainty that discourages investment and hiring.  We end up with a thicket of ad hoc responses to legislative pipe dreams that lead to further problems that lead to more ad hoc responses and on and on.

In some respects, the RIN fiasco is the least of the renewable mandate’s sins.  Ethanol is a disaster on many dimensions, economic and environmental.  These problems are bad enough, but the EPA’s action is emblematic of a broader problem with the mega-legislation of the Bush-Obama years.  The legislation is unworkable, and compels delegation of considerable discretion to largely unaccountable administrators.  It undermines the rule of law and makes the US more like a natural state-or banana republic.

We already know Jake Appelbaum was in Hawaii for a dream-of-a-lifetime birthday trip during the last week of March, 2013.*  Right when Snowden was starting work at Booz Allen Hamilton.

And wouldn’t you know, another famous-very famous-hacker, and BFF to Appelbaum, was also in Hawaii at that very time.  Specifically, Moxie Marlinspike, a rather renowned security expert and hacker noted for exploiting flaws in SSL held the “First Annual Spring Break of Coding” (“SBoC”)-wait for it-23 to 31 March.  First Annual.  Like, it never happened before.  The idea just came to him.

Interestingly, Appelbaum doesn’t mention Moxie (he does blather about his “20 friends” but doesn’t name any) and Moxie doesn’t mention Appelbaum, but we know that they knew of each others’ presence.  One of the SBoC attendees, one Christine Corbett, posted on Instagram a photo of Appelbaum in Hawaii in a series of photos taken at the SBoC (a stream that includes a photo of Moxie too). (Scroll down to March 2013 photos.  Oh, and don’t bother removing them, Christine.  I have the screen caps.)   The mutual non-recognition of the others’ presence is quite odd.

So odd, that it has to be deliberate, especially given that Moxie and Appelbaum have broadcast to the world when they are together, and mooted plans to get together.  Appelbaum and Moxie interact on Twitter.  They have traveled together.  And speaking of travel, they also have more in common, and in common with Poitras.  In particular, they-and their electronic-all get up close and personal attention from law enforcement whenever they fly.  Moxie can’t even print out his own boarding pass when flying domestic, and is subject to special TSA screening.  He has also fulminated, like Appelbaum and Poitras, against the security state.  They all share an agenda.

Note when the SBoC was announced.  23 January.  Poitras and Snowden-per Piotras’s own admission-were in communication by that time.

And speaking of Poitras, Corbett mentions an unnamed female journalist with an intense interest in politics being present at SBoC.  Given that Poitras and Appelbaum are closely connected-and connected to Snowden-what are the odds that said journalist was Poitras?

One more fun fact.  If this Cryptome post is to be believed, Snowden generated a PGP public key (using his BAH email address) on . . . 24 March, 2013.

Perhaps it’s all a coincidence that a group of hackers, including two of the most well-known hackers with a known animus to the “security state” are in Hawaii at the same time that Snowden starts his NSA work at BAH.  A group that has-at most-one degree of separation from Snowden: with Jake Appelbaum as the common link.

Perhaps.  But a far more plausible hypothesis is that this was a hacker version of Oceans Eleven, a gathering of specialists implementing a plan to steal information from NSA.

The most problematic aspect to this hypothesis is the tight timeline, with Poitras claiming first contact with Snowden about the same time as Moxie broadcast the invitation to SBoC.  But it is only problematic if you (a) believe Poitras is telling the truth, which can be doubted given that she has an incentive to dissemble and given her dissembling about her activities in Iraq, and more importantly, (b) you believe that Snowden reached out to Poitras first.

With regard to (b) I advance the following conjecture: Snowden was in contact with Appelbaum first, and well before January, 2013, and Appelbaum directed Snowden to Poitras.  It would be natural for a computer geek and hacker like Snowden to know of, and to reach out to, Appelbaum.  Far more natural than to reach out to Poitras first.

Under this conjecture, the timing works out.  Snowden, Appelbaum, and Moxie work out their basic plan in late-2012 or early-January, 2013.  Appelbaum activates the plan to disseminate the information via Poitras by putting Snowden in touch with her and near simultaneously Moxie initiates the SBoC to give him cover to travel to Hawaii (and perhaps too a team of unwitting accomplices that could help him cover his activities while there).   They all converge in Hawaii a couple of months later, and then or soon thereafter Snowden steals over 10K documents from NSA.

I’d be more than interested in reading an alternative explanation of this hacker convergence that shaves better with Occam’s Razor than the one I advance above.  Means, motive, motivation, and opportunity all line up.

Interestingly, Appelbaum doesn’t feel that it is safe for him to return to the US.  He is hanging out in Germany.  Which just happens to be where Poitras is leading a media campaign (through Der Spiegel) to whip up anti-US sentiment over spying-and with considerable success.

Just more coincidences, surely.

* Of course one can doubt this story.  Catherine Fitzpatrick believes that she can place Appelbaum in Hawaii the previous year.  And Appelbaum’s carrying on about this, with all the bologna about manta rays and unicorns and rainbows suggests he’s trying to construct some sort of cover story.

I thought The Bloodhound Gang was lame during its heyday, such as it was, in the late-90s.   Which is probably why they’re playing FSU hotspots like Odessa, rather than the Warped Tour.  While in Odessa, the bassist tried to suck up to the western Ukrainians by using a Russian flag as something that is in very short supply in Venezuela. (Perhaps they got wind of stories like this and figured that an anti-Russian gesture would go over quite well right now.)

Not a bright move, given that the band’s next stop was in Russia.  They were kicked off the bill of a festival in Kuban/Krasnodar.  While hotfooting it to the airport, their car was pelted with eggs and tomatoes (that wouldn’t have happened in the late-90s!, given the economic conditions at the time).  When in the airport, they were set upon by a group of self-styled Cossacks, fittingly dressed in black shirts.  The band was roughed up before security personnel belatedly intervened.

And of course, the Cossacks needed to celebrate their victory over the evil американцы. And since two wrongs make a right, their response to an insult to the insult to the Russian flag was to insult the American flag. Which I’m sure just happen to be readily available in the Anapa airport. Oh, and that was after the “Cossacks” attempted to smother the bassist with it.

Keep it classy, folks. Keep it classy.

Here’s a video of the confrontation (h/t LL). All those thinking of going to Sochi next February might want to take a look, though if you’re so clueless as to still be entertaining that idea, it probably won’t make a dent.

While speaking to the Putin Jugend at Lake Seliger, Vova talked about Navalny.

First, he expressed surprise at the sentence meted out to the opposition figure.  Claude Rains couldn’t have done it better.

File this in the “fucking with Navalny’s head” category.

Second, he established ground rules for criticizing him and the Russian government: you must be perfect.

I do not exaggerate.  Not in this, not ever!:

At the same time, Putin stressed that “those who fight evil must themselves be without flaws” and added that the opposition must learn to act within the framework of the law.

Putin always did remind me of Jesus: “Let he who is without sin cast the first stone at her.” (John 8:7).

And always remember: in Putin’s Purgatory, “the framework of the law” is whatever Putin decrees, at the moment.

Snowden’s “lawyer” Anatoly Kuchenera is a mouthpiece in the true mafia tradition.  His alleged principal, Snowden, is silent.  Kuchenera does all the talking.  (Actually, Putin is the real principal here.)

For some reason, whenever I read Kuchenera’s name, the song “La Cuckaracha” pops into my head.  Go figure.

Since he is the only source of information about Snowden, and since reporters will slant their coverage to ensure access to the sole source, Kuchenera has received very little critical scrutiny.  There are idiotic pieces like this one: “Kuchenera Suspected of Links to Kremlin.”

Suspected? Who knew?

The NYT reporter credulously regurgitates pearls like this:

“This is in the realm of big politics,” Kucherena said. He added, though, that Snowden’s appeal was a purely legal matter that would prevail on the merits.

“I am a lawyer. I don’t want to be involved in big politics,” he added.

Tell us another one.  Yeah.  Purely legal matter.  Politics have nothing to do with it.  Kuchenera doesn’t do politics.  Uh-huh.  He’s clearly a made man in Russian politics.

Kuchenera has played his part in this drama with aplomb.  Case in point.  He has made a big deal out of his claim that Snowden hasn’t had a change of clothes in over a month.  All to perpetuate the fantasy that he has been holed up in SVO, and completely on his own, all this time.

This is about the only article that calls bullshit on the charade being played out in Russia.  It quotes Andrei Soldatov, a journalist who has written extensively about the “New Nobility”-the siloviki who have restored the Russian security state, and made themselves rich and powerful in the process.

Soldatov knows intimately the ways of the FSB and GRU, and describes the reality of the Snowden situation exactly:

The asylum decision gives Russia cover to depict itself as a defender of human rights, pointing a finger to deflect criticism of its own poor record on rights including free speech. But the secrecy that surrounded Snowden’s time at the Moscow airport and his unwillingness so far to talk to the press indicates he is being controlled by Russian intelligence, Andrei Soldatov, a Russian journalist who co-authored a book on the Russian intelligence services said.

“Does he have independent sources of information and communication? My impression is that he has none, which means he’s not his own master,” Soldatov said.

He said Kucherena’s statements about concerns for Snowden’s safety do not hold water.

“We are all perfectly aware that Snowden, who has just received asylum, does not face any danger in Russia,” Soldatov said. “American intelligence does not kidnap or assassinate people in Russia, that’s a fact. This is a just a pretext.”

One of the reasons for keeping Snowden isolated may be to prevent him from speaking about the people he met and what really happened to him during the 39 days he spent in the airport’s transit zone, Soldatov said. For the same reason, Soldatov said he expected Russian authorities to find a job for Snowden that will prevent him from having contacts with journalists.

All absolutely true.  Especially calling bull on Kuchenera.

Another pointed clue, this one from Kuchenera himself, showing that Russia has decided to keep Snowden under its tight control:

It was Kucherena who counselled Snowden to abandon his appeals for political asylum in more than 20 other countries, arguing that they had no legal standing while he remained on Russian soil.

“No legal standing.”  More bullshit-and in exact contradiction to what Putin was saying (“he should go”) through most of the SVO kabuki theater. Instead, Snowden was told fuggedaboutit.  You’re staying here, boy.  Kuchenera was the messenger.  Perhaps he “persuaded” Snowden through legal legedermain.  But if that had failed, harsher persuasive methods would have been employed.  The point being that the decision was not Snowden’s to make.  (Providing support for my argument that the US should have called Putin’s bluff and said that Snowden was free to travel to Venezuela.  Now there is sufficient ambiguity that the credulous will be gulled by the Russians.)

Kuchenera has willing accomplices in the West, notably at outlets like the Guardian and various German media. This Guardian piece is especially egregious, claiming Putin had no choice but to offer Snowden asylum.  The writer-a Russian-American who talks about “my government” in critical tones and about Russia’s in soft, sympathetic ones-makes it sound like Snowden was some valuable piece of flotsam that washed up on Russian shores, to be discovered by beachcomber Vova, who is just playing finders-keepers, and is compelled to protect Snowden.  Because it was the “moral thing” to do:

With Snowden, the Kremlin did the moral thing – and the moral thing also happened to be the only thing the Kremlin could do in this instance. Essentially denied safe passage to Latin America, Snowden was marooned, and letting him languish in Sheremetyevo indefinitely would have dented the Kremlin’s credibility at home and abroad

Yeah.  Putin puts morality first.  Spare me.

And please.  The idea that Snowden could just fly into Moscow without the knowledge, and indeed, the connivance, of the Russian security forces is beyond risible.  There is some question of when Russian security forces took control of Snowden.  Some (like Catherine Fitzpatrick, I believe) suspect that Snowden was (wittingly or unwittingly) a Russian asset while in Hawaii.  I am not of that view, but now I have little doubt that once he boarded that Aeroflot plane bound for Moscow from Hong Kong, he was little more than a fly caught in Putin’s web.

And he will remain in that web for, well, pretty much forever.  If he had returned to the US, Snowden’s sentence would have been measured in years.  Once he chose Russia, the sentence is life.

It’s Friday, and so a funny is called for, and this article on Rosneft in Eurasia Review (“News and Analysis”!) fits the bill.  The Tiger Beat tone of Kerim Has’s article has to be read to be believed.  Yes, he does acknowledge Rosneft’s dependence on the Russian state, but he still gives the impression that Rosneft is a real commercial venture.

Rather, it is a corporate Frankenstein, stitched together from stolen body parts and vivified by jolts of state power.  Here’s how the article treats the most important such part:

At this time, Yukos, then the largest petroleum company in Russia was having its assets transferred to Rosneft, a process which continued until 2007. And Sechin was one of the main actors in the Kremlin’s energy policy in this process

“Having its assets transferred.”  How’s that for a euphemism?: that’s not funny, it’s sick.  Note the passive voice.  Just who did the transferring?  How did that “transfer” take place?  And-most importantly-was the transfer consensual?

My neighbor had his assets transferred once.  It was called a B&E by the police.

I actually agree with one part of the article:

To sum up, energy politics and “pipeline diplomacy” which aimed Russia to regain its “global power” position in international arena seem to keep their vital importance still for long as key instruments of Kremlin’s foreign policy. During 2000’s, Putin’s this state-centred energy strategy allowed Gazprom to become a giant company in both the domestic and international natural gas markets. And now, it is being reapplied to clinch Rosneft’s dominance over the petroleum production and exporting sector. Rosneft is taking on important duties for the Kremlin, and it looks as if it will be one of the vital pillars of Russia’s transformation into an energy superpower.

There is no doubt that Putin will succeed with Rosneft just like he “succeeded” with Gazprom.  He will succeed in creating a corrupt, bloated, inefficient, wasteful firm that is indeed a giant.  But the most gigantic thing about it will be its capacity for value destruction and peculation.  Indeed, he’s almost there.

It’s all so confusing.  During the last spasm of Congressional criticism of the “financialization” of commodity trading, mainly during the Frankendodd “debates” over position limits, the target of criticism was evil speculators who trade commodities for purely financial reasons, and who have no involvement in the physical markets.

In the latest incarnation, the alleged problem is that financial firms that trade commodities paper do have physical commodity operations:

What concerns Brown and Senator Jeff Merkley, Democrat-Oregon, is that banks have numerous physical commodity holdings as well as the means to deliver those commodities, including oil tankers, transmission rights and pipelines, while they at the same time trade on energy prices in futures and swaps markets.

Big banks can buy “vast quantities” of commodities and pipelines, tankers and warehouses, said Merkley. This gives them “a huge amount of market information that’s very advantageous in trading” and gives them a “thumb on the scale in the terms of supply and demand and being able to have some influence over the price,” he said.

“If you’re simultaneously allowed to bet on the price and you’re allowed to have your thumb on the scale in reflecting the price it’s a huge conflict of interest,” he said.

“Financial institutions own fleets of oil tankers and can withhold delivery, while wagering on the price of oil or they can speculate on the price of energy while controlling supply,” Brown said.

This, the senators said, is a clear conflict of interest that is driving up commodity prices.

Make up your minds, people (which generously assumes you have them).  Is the combination of physical and financial trading a good thing, or a bad thing?

As someone who has arguably written more about commodity market manipulation than anyone alive, I can say definitively that the most costly manipulative strategies-corners and squeezes-involve trading of “paper” (e.g., futures contracts) and the physical commodity.  These strategies involve either taking excessive deliveries, or buying in excessive quantities in the physical market.  Engaging in a market power manipulation requires some involvement in the physical market.

Historically, many of the biggest manipulations have been undertaken by hedgers.

And that’s the key point that escapes the Washington hand-wringers.  On one of their wringing hands, they lament the involvement of non-hedgers in markets (let’s leave aside how you can have hedgers without speculators to take the other side of trades).  On the other, they bemoan the fact that those involved in both the physical and financial commodity markets-who are often hedgers-can sometimes exploit market power to enhance profits.  But if you believe that a primary function of commodity derivatives markets is to facilitate risk management by those involved in the producing, marketing, storing, and processing of commodities, you have to permit the physical traders to trade derivatives.

One of the consequences of that is that there will be manipulations by physical players.  But severing physical and financial trading in order to prevent manipulation, which is what Brown and Merkley and others are suggesting, is crack-brained.  It throws the hedging baby out with the manipulative bath.

And it is particularly crack-brained to focus on just one category of market participants, like banks.  The potential for manipulation exists due to frictions in the physical market, and the ability of some market participants to trade both derivatives and the underlying commodities.  Someone will step into the banks’ role if they are precluded from the market, and the potential for manipulation will remain.  Taken to its logical conclusion, the Brown-Merkley “conflict of interest” standard would preclude any entity-not just banks-from trading both commodity derivatives and the underlying physicals.

So what’s the best way to attack manipulation?  Not by destroying the ability of the markets to perform their vital risk transfer function.  Instead, as I’ve argued for going on 20 years, the best way is to impose penalties after the fact for manipulative conduct.  Thus, at least conceptually, I support FERC and CFTC enforcement efforts.  The problem is that practically their efforts are often misdirected and intellectually confused.

Congress should economize on its limited comprehension of these issues by focusing on the key problems, rather than throw around vapid phrases like “conflict of interest” and recommend policies that undermine the ability of financial and physical commodity markets to function effectively.  Better anti-manipulation laws predicated on a clear understanding of how manipulation works would be the place to start.  And no, this does not involve the Xeroxing of 10(b)(5) of the Securities and Exchange Acts and inserting it into commodity trading laws, which has been Congress’s default response for about a decade.  There is a complete mis-match between the fraud-based thrust of 10(b)(5) and the market power problems that sometimes arise in commodity markets.  I’ve made recommendations over the years on the right regulatory/legislative approach that would target market power problems more precisely.  This approach would permit the markets to exploit the synergies between paper and physical trading while at the same time improving the efficiency of these markets.

But instead, we get Congressional schizophrenia and meat cleaver approaches that would, if taken to their logical conclusion, destroy the markets in order to save them.

A further thought.  Those who have the ability to trade the physical, and who have extensive information and developed logistical capabilities are usually the best positioned to break corners, and to mitigate the frictions that make corners possible.  They also have the strongest incentive when they have a derivatives position that would be hurt by a manipulation.

I’ll post a link when I have a chance, but P.D. Armor’s breaking of the Leiter wheat corner in 1898 is a great example of this.  There are many others.

Putin’s condition for granting Snowden asylum was that Eddie stop leaking information that would be damaging to Russia’s “American partners.”  I sensed a scam, and yesterday and today proved that is indeed the case.

Yesterday Greenwald published another of his stories based on Snowden documents.  This one was about a program called XKeyscore.  It was the usual mixture of hype about capabilities, and underplaying of how the program is actually used, and what constraints and protocols are in place to prevent its misuse.  This is another highly classified program, and its revelation would presumably fall into any realistic definition of damaging.  But the next day, Snowden walks out of SVO to his new life.  (Good luck with that, son.  The experiences of those who have defected before you should depress you immensely.)

Snowden’s FSB-connected mouthpiece (who looks like a real mouth-breather to boot) was asked about this today, and had a weasely lawyer’s answer:

When questioned about how the vow fitted in with new revelations about XKeyscore, the massive information-collecting program exposed in the Guardian on Wednesday using Snowden’s data, Kucherena said that the documents about the surveillance software suite had been passed on to a journalist while Snowden was still in Hong Kong.

So anything that Snowden revealed to Greenwald (or Poitras, or anyone else) prior to his arrival of Russia does not count as a Snowden leak that violates Putin’s condition.  Which means that Putin’s condition is absolutely meaningless, because Snowden apparently provided thousands of documents to Greenwald prior to fleeing to Russia.  He also talked extensively with Greenwald and Poitras.  So they can go to town leaking Snowden material, and per Kucherena’s formulation-which is no doubt Putin’s-Snowden is living up to his bargain with Putin.

Meaning that Putin’s condition means bupkus.  But he gets to pose that he’s crafted some sort of compromise between the extremes of sending Snowden to the US, and letting him leak to his heart’s content.