There are other reasons, but the analogy is, to me, obviously inapplicable.
Not quite. Use your example of a large block trade.
* Because it is incredibly expensive: check
* Because the B/D agmt usually has conditions: check
* Because the execution is provided after all the details of the trade/'s financials: check
* Because the ruthless withdrawal of a term sheet could put the [trader's book] in a distress situation that harms their ability to obtain [another execution]: check.
Obtaining funding is incredibly hard. Each individual term sheet is also incredibly hard.
Shopping a block is hard. Posting a limit order is incredibly cheap, cheaper than it has ever been in human history. Failing to execute also doesn't make posting a next limit order more expensive.
What I outlined above is why your BD acting in bad faith is illegal under the securities law. It's not even a grey area.
Put your security research hat on for a moment. The "other side" of the trade wants to get the info subject to BD confidentiality (pt 2) and the exploit them (pt 3,4). When your BD does this it is expressly illegal. This has a name but mentioning it here would just confuse the issue. The question is this: what tools are available to this "other side" that would put the NPI in the hands of the "other side" but not divulge it more broadly? Would a bad-faith offer to do a ("sweet") biz deal be good enough bait to social engineer selective disclosure? Unless you can rule this out technologically, you have to rule it in for consideration.
It's best not to get sidetracked on whether the divulged info is legally NPI or PI (just yet) and look at it purely from a pragmatic perspective like a security credential. The BD either has it under control or not. And is it physically possible in terms of bits to have selective disclosure? And if it is does the pretext matter?
Make no mistake: the BD cannot hide if he abuses the information directly. He's like an authorized user. The issue is what level of authorization you give the counter-party and how to protect its abuse. The technical details and legality of pretexting security credentials is something I'm sure you could speak authoritatively to. I'm only using it as an example here for illustrative purposes.
General comment: I think you are over simplifying the P&L of a trader. The HFT stuff impacts hedging costs. And the ability to solicit grey/NPI. Note they are not urelated.
Also, if you just look at bid/ask and Volume...you never see the $$ value of this.
Las comment: the so called: "profit guarantees" just means perfectly hedged trades with no ∆ (net exposure). its not literal its a simplification yet directionally correct.
With all due respect, this discussion is degrading because you've responded to each of my comments with a non-sequitur. I write responses to you with zero hope of us coming any closer to shared understanding; I have the feeling less of building anything interesting in these discussions, but instead of having taken the bait.
Look: As a general rule, people should act in good faith.
That is the point I raised here when you jumped in. Its a fair counter-point to say that adding strategic uncertainty is not blanket illegal. But as a general rule, we don't encourage bad faith actors.
Same is my view on posting comments to HN.
The reason I raised this point with the sub-thread op is as follows. Not goint to use my own words to provide some objectivity. This is from PG, so I hope you respect it at face value.
To founders, the behavior of investors is often opaque—partly because their motivations are obscure, but partly because they deliberately mislead you. And the misleading ways of investors combine horribly with the wishful thinking of inexperienced founders. At YC we're always warning founders about this danger, and investors are probably more circumspect with YC startups than with other companies they talk to, and even so we witness a constant series of explosions as these two volatile components combine.[1]
This is important insight. It mentions the risk of bad faith dealings specifically and at a general level of abstraction that is intuitive to grasp. Its good reading for its intended audience.
I'm going to re-word this to put this in a slightly different context (but one relevant to this thread). These are words I would not have a problem putting in front of a rookie trader on day 1 of the job:
To [a rookie], the behavior of [deal counter-parties] is often opaque—partly because their motivations are obscure, but partly because they deliberately mislead you. And the misleading ways of [counter-parties] combine horribly with the wishful thinking of inexperienced [rookies -- that are unprepared]. At [Co X] we're always warning [rookies] about this danger, and [counter-parties] are probably more circumspect with [our trades] than with other companies they talk to, and even so we witness a constant series of explosions as these two volatile components combine.
The motivations and ways trades can go wrong have similarities accross asset classes. Market practitioners can speak to this from experience. Over tha past 15 years or so, in particular more shops have become "stage agnostic" in PE and "asset class agnostic" in various other vehicles. The reason this is possible is because these abstractions have become better known.
* You've fled to abstraction rather than discussing the specific argument that you yourself brought up.
* You've appealed to a supposed authority (Paul Graham) who is simultaneously (a) not an authority of the ethics and assumptions of trading markets and (b) not actually making any statements about trading markets.
* You've begged the question, asserting that because ruthless withdrawal of a term sheet is unethical, therefore cancellation of a resting limit order must also be unethical.
One should assume they are dealing with a manipulative psychopath. The only people who preach that you should not heed this advice are...you guessed it...manipulative pschopaths. =D All of the same behavioural stuff that makes people pay money to secure computer networks applies to business deals. It is just the way the world works.
That is not the same advice as condoning bad faith, manipulative behaviour. The advice is to act as if bad actors exist. The advice is <not> to act "as a bad actor".
When it comes to cancellations, it's way to facile to say something like 'cancelations are always possible, therefore all cancellations are always kosher'. Instead, markets are <always> structured along the lines of 'bad faith is always possible, therefore precautions are always taken'. Again, this parallels with network security so I'm sure I don't need to explain it from first principles.
If you want to argue "bad faith is always possible, but..." then that's fine. You need to explain why precautions should be discarded. The idea that we should look the other way to bad faith is not justifiable as a standalone idea. You would actually need to show that bad faith could do no harm because of XYZ technological protection.
If you want to make the argument that technology provides "perfect security", you are welcome to do this. But not only do you need to establish that, you also need to establish the social equivalent. That is, that all business contracts are "perfectly written" and all legal proceedings are "perfectly resolved", and that the costs of all this perfection are ~essentially zero.
That is the path of least resistance for your position.
Cancellation of a resting limit order isn't "bad faith". Everyone participating in trading on the exchange knows that orders can be cancelled. Cancellation is one of the rules of the game.
This isn't a subtle point; it's so obvious that it's hard to understand why it even needs saying.
You need to whiteboard an example. You cannot say "this random piece of $foo terminology" is #anything. Because there are "other random peices of terminology" besides the ones you've heard of that might come into play. And these come into play in complex systems. And you need to define the system as well. And then go through the -N- permeutations of the system at a physical level. And then at the social level (including norms and regulations).
[Again, this is just like a security analysis. You'd never accept #random_persons_problem thrown your way without context, would you?]
#1 In a simple world like open-outcry, exchange-exclusive markets (not dis-similar to the 1990's) even the most basic scenario is nothing HFT intermediation today. Not only instanaeous execution but live-presence real-time surveilance and extended serial-reciprocity, etc. These are non-reproducible safe-guards {all} in HFT sceanios of ineterst.
#2 "Cancellation of a resting limit order isn't "bad faith"" even this concept in plain english is wrong. I may act in bad faith deliberately. You can't rule that out. You can't make indference about my intentions. You can only hope that the consequences are not a problem. If the rules are perfectly written and enforced, &tc.
#3 The consequences of #2 depend upon the context of #1, but fleshed out in full detail. Its possible to design systems where the <consequences> of bad faith are greater and lesser problem/s. Totally fair point. And if you assume a perfect world, you asymptoically get to a place where "you don't need to worry about it". Alternatively, you can design a world that goes in the other directin.
#4 "Cancellation is one of the rules of the game." Rules everywhere are grey. And this is buy only a single one of many that interact together.
Read the second link in my earlier note. This is as much technical issue. Unless you are at that level, everything else is completely trivial.
