Spoofing, Art and Mergers

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Spoofers gonna spoof.

Here's a story about spoofing that starts with an anecdote about an alleged spoofer "whom securities traders call 'The Russian,'" but later in the article we learn that at his old job "he earned nicknames like 'Snuggles' and 'The Pig,' although former colleagues say they aren’t sure why." So the first sentence of the story could have been:

CHICAGO -- One June morning in 2012, a college dropout whom securities traders call "Snuggles" logged on to his computer and began trading Brent-crude futures on a London exchange from his skyscraper office here.

Missed opportunity, that. Also if you worked with someone nicknamed Snuggles, wouldn't you move heaven and earth to find out why?

Anyway, spoofing, the weirdly dumb trading strategy of pretending you want to buy a lot of stuff in order to push up the price, and then actually sell. As the article points out, disguising your intentions is a time-honored part of trading, and it can be hard to tell what's spoofing, since lots of legitimate strategies involve updating your orders frequently to respond to new information. It's not just spoofers who cancel most of their orders. Snuggles himself -- his real name is Igor Oystacher -- apparently defended his trading by saying that "we are clicking in response to what we are seeing,” and: “If we click quicker than most, it is a skill.” (Clicking, yes: Like a lot of spoofers, apparently, Snuggles did his order entry via keyboard, not algorithm.) But there's "a detailed history of instances where Mr. Oystacher entered and quickly canceled a bid or offer while simultaneously placing an opposite order," which you could read as being more indicative of spoofing than legitimate updating of orders. Still, while I'm not sure I'd go as far as John Arnold's claim that spoofing makes markets better, I have trouble getting all that worked up about Snuggles.

Elsewhere in market structure.

Here's the story of a guy who sold a photograph for $6.5 million to ... someone. Definitely someone! "Joshua Roth, the Los Angeles lawyer who represented the buyer, declined to name his client, though he emphasized that the client exists." Normally one doesn't need to emphasize that. The whole story is a delightful meditation on what prices might mean. The photographer, Peter Lik, sells the same photo at rising prices: "the first print sells at about $4,000, with the price rising as the edition sells out." That perhaps creates an impression among potential customers that their prints will appreciate in resale value -- though, in fact, most actual resales are well under the $4,000 starting price. So is it misleading? Well, I mean, someone is paying the higher prices, right? If you have a willing buyer and a willing seller, in what sense is the price wrong? And yet it does seem wrong. Art is a mystery, but this mystery is not about art, it's about prices. Is the right price the price you can get away with, or only the price someone else can get away with? Also perhaps worth pondering is that "Mr. Lik worked very hard and had sex with many models." 

Happy Merger Monday.

Or more to the point, happy Merger Sunday to Valeant and Salix, who very unconventionally announced their $14.5 billion deal during daylight hours yesterday. The way mergers normally work is that you negotiate and draft like mad from the close of business on Friday until the opening of business on Monday, because once the markets open if you have anything material to announce you should probably announce it. But since you know the deadline is Monday morning, the negotiations normally expand to fit that time. Getting done by Sunday afternoon is unusually luxurious for the bankers and lawyers involved, and I congratulate them on their full night's sleep.

You can see why they were in a hurry: The deal came together in just over three and a half weeks, after Valeant failed to buy Allergan and Allergan declined to buy Salix, leaving Valeant and Salix standing around awkwardly eyeing each other. When rumors of the deal surfaced on Friday, Salix's stock jumped almost 5 percent to $157.85. The deal price is $158 per share in cash, which is nothing to write home about. The press release doesn't even bother to compute a premium over some unaffected or average or whatever trading price, and this is not a particularly flattering thing for the acquirer's chief executive to say about his prize:

The per-share offer was fair given Salix’s inventory issues, a Department of Justice investigation, and the fact that Salix recently had to restate its results, Valeant’s Pearson said. “The underlying price of this company is much lower than it was on Friday when everyone thought this deal was being done,” he said.

Well, fifteen cents higher, technically, but you get the idea.

Elsewhere in mergers, the rising dollar may help U.S. companies acquire foreign ones, though keep in mind that foreign companies -- like Valeant, which inverted into Canada in 2010 -- have their own tax advantages in acquiring U.S. ones. 

Greece.

On Friday, Greece and the trio formerly known as the Troika agreed that the last few weeks of high-pressure negotiation have been so good that they'll keep it up for another four months. The first pressure point of the four-month extension was that Greece was supposed to "present a first list of reform measures, based on the current arrangement, by the end of Monday February 23," which is today. The current situation seems to be that a "draft of the reform measures was submitted ahead of a formal evaluation," but "Athens is expected to send a more detailed submission on Monday," and everything is about as stressful and difficult as you'd expect. On the one hand, the proposals "would be 'mainly of a structural nature' and would not include details of projected revenue increases or spending cuts"; on the other hand, Greece's leaders are not exactly being hailed as heroes by their own party for more or less agreeing to continue the austerity that they were elected to end. Elsewhere, Duncan Weldon defends can-kicking. And what does Slavoj Žižek think?

Bond yields. 

Here Felix Salmon argues that companies probably can't issue bonds with yields below zero, because Apple didn't, and here Joe Weisenthal argues that they probably can, or at least, that Apple didn't prove that they can't. I don't know, I'm weakly in the zero-is-just-another-number camp, and I'm a little puzzled that we haven't heard about Nestlé or someone issuing negative-yield Swiss-franc commercial paper already. Elsewhere the Portuguese 10-year yield is below the U.S. one, so maybe don't get too hung up on nominal bond yields. And here is a story about how U.S. banks own more than $2 trillion of Treasury and agency debt, which is unlikely to get them back to a 20 percent return on equity, though I guess it's better than owning Portuguese debt.

Things happen. 

HSBC Holdings had a bad year. Carlyle Group is having a rough time with its hedge funds. Bill Gross is having a rough time in the energy sector. Things are tough in "a one-square-mile patch of Italy sitting within Switzerland and peopled by Italian citizens." Soon you'll be able to short Chinese stocks. A lot of companies are getting caught up in the Petrobras corruption investigation. What's the LuxLeaks guy up to? Ellen Pao's lawsuit against Kleiner Perkins is going to trial this week. "Perhaps any sufficiently advanced logic is indistinguishable from stupidity." How an Entry-level Investment Banker Does Money. "Yes, it started as fanfiction, but then so did the Aeneid." 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net