If algos can mis-value a book by $23.7m…
… how might they be mis-valuing equities?
So asks Themis Trading on Tuesday after discovering this curio of a story from CNN about algo-bots gone wild on Amazon.
The story relates to the listing of a book called “The Making of a Fly” by Peter Lawrence on Amazon.com on April 18 for no less than $23,698,655.93 (plus shipping) — seemingly the result of an algo price war.
The price anomaly itself was unearthed by Michael Eisen, an evolutionary biologist and blogger, who logically observed this couldn’t be a one off situation.
As he noted on his blog:
What’s fascinating about all this is both the seemingly endless possibilities for both chaos and mischief. It seems impossible that we stumbled onto the only example of this kind of upward pricing spiral – all it took were two sellers adjusting their prices in response to each other by factors whose products were greater than 1. And while it might have been more difficult to deconstruct, one can easily see how even more bizarre things could happen when more than two sellers are in the game. And as soon as it was clear what was going on here, I and the people I talked to about this couldn’t help but start thinking about ways to exploit our ability to predict how others would price their books down to the 5th significant digit – especially when they were clearly not paying careful attention to what their algorithms were doing.
Cue in-depth analysis of third party vendors providing pricing algorithms for independent traders on Amazon and Ebay.
As CNN points out, individual booksellers on Amazon and other sites pay such companies for services which automatically update prices. Some work very well, “getting sellers up to 60 per cent more sales because they underbid the competition automatically and repeatedly”.
Some, as the case above illustrates, lose touch with reality altogether.
Now, as Themis Trading points out, all of this does bear an uncanny resemblance to what’s going on in financial markets thanks to the algo strategies deployed by high frequency traders.
These sorts of algos, after all, are equally prone to losing touch with the fair value of the equities they are pricing, as the notorious flash-crash of May 6 proves. Now, if you keep the parallel going, that means the example of the $23.7m fly book is nothing more than Amazon’s own equivalent of a market flash or dash.
As Themis’ Sal Arnuk observes:
So, now we have Flash Crashes and Flash Dashes outside the stock market! Is everything being priced in the universe today, not with forethought, but rather as some relation to another price, which in turn is set in relation to yet another price? All without human intervention? Is this wise? Is anyone doing the thinking? Is anyone doing “the work” in our stock markets, as well as on AMAZON? On the eve of the May 6th Flash Crash, perhaps it is wise to think about that question.
Of course, while most ‘flash crash day’ trades were cancelled in the end, we wonder how many Amazon buyers who realise they’ve been had via algo mispricing end up cancelling their trades. And how often it happens.
Secondly, does this make Amazon and Ebay the dark pools of the retail sector, with John “never knowingly undersold” Lewis the equivalent of a market exchange?
And last – is it time for a retail versus financial market structure comparison diagram? We think yes