Tag Archives: investment

Platform providers fake being popular

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Crowdfunding platforms, stock exchanges and other providers of two-sided markets want to appear popular, because having more buyers attracts more sellers and vice versa. The platform’s revenue is usually proportional to the number of users, because it charges a commission fee on trades or advertisers pay it to show ads to users. The exchange’s marginal cost of a user is close to zero, giving it an incentive to fake a high volume of trades, a large limit order book and a small bid-ask spread.

The platform’s cost of posting a great volume of outstanding buy and sell orders at a small spread is that many investors try to trade at these favourable bid and ask prices. Either the market maker has to take the other side of these attempted transactions or is found fraudulent. Taking the other side results in a large loss if some investors are better informed than the exchange.

The platform could falsely display a large trading volume, but keep the order book honestly small by adding fake trades at prices between the bid and the ask only, so no investor’s real limit order is ignored. This seems difficult to detect, unless one side of the limit order book is empty (e.g. no buyers) and at least one at-market order on the other side (e.g. a sell) is outstanding. In this case, any trades occurring would have to satisfy the at-market order. However, the platform or real investors can then take the other side of the at-market order at a very favourable price to themselves, which discourages at-market orders. A large trading volume with a thin order book is still slightly suspicious, because it requires that crossing buy and sell orders between the bid and ask prices arrive almost simultaneously, in order to be matched without appearing on the order book for long, and without triggering the real limit orders. Displaying the fake buys and sells on the order book risks attracting actual matching trades, which the platform would have to honour (at a cost).

Without automated quote matching, there are no at-market orders, for example on the Funderbeam crowdfunding platform. Instead, everyone either posts a limit order or picks an order from the other side to trade with, e.g. a buyer chooses a sell. Investors can pick an order with a worse price (higher sell or lower buy) on the other side, which frequently occurs on Funderbeam. Choosing a worse price is irrational, unless the traders in question are colluding, so the asset is effectively not changing ownership. Reasons to carry out such seemingly irrational trades are to manipulate price and volume, e.g. price can be raised or reduced by targeted trades outside the bid-ask interval. Volume can only increase after added trades, rational or not, but such seemingly greater activity is exactly what benefits the stakeholders of the platform. The employees of the market maker have a natural motive to fake-trade between themselves to make their firm look good, even without any inappropriate pressure from their boss.

Another way to attract issuers and investors is to demonstrate successful initial public offerings, meaning that the funds are raised quickly (good for issuers) and the price of the newly listed stock (or other asset) goes up, which benefits investors. Adding fake capital-raisers is difficult, because potential investors will check the background of the supposed issuer. Inserting spoof investors into an actual funding campaign is costly, because real money would have to be invested. One way to manipulate popularity upward is to simultaneously add a fake issuer and fake investors who satisfy its funding need. The idea is to not leave time for real investors to participate in the campaign, by pretending that the capital-raiser achieved its target funding level before most investors could react. This is easier in markets with a small number of real investors and without an auto-invest feature. However, the real investors who were supposedly pre-empted may still research the supposedly very popular issuer.

A costless way to briefly boost the popularity of a real fundraising campaign is to add fake investors after the target funding is achieved, and forbid issuers from increasing the target or accepting funds from those who subscribed after the goal was reached. Any campaign meeting its target can then be made to look heavily oversubscribed. However, if the issuers are informed in advance of the restriction not to increase the target, then they may find an alternative unrestricted platform to raise funds. On the other hand, if the restriction is not mentioned beforehand, then it will likely anger the issuers who will then create negative publicity for the platform. Competition between exchanges thus curtails their manipulation incentives.

The platform can motivate real investors to raise their bids when the campaign reaches its target by rationing demand: bidders in an oversubscribed share issue get only a fraction of what they wanted to buy. Anticipating this, buyers will increase their requested quantities so that the fraction of their new bid equals their actual demand. This makes the campaign look oversubscribed and creates a feedback loop: if other investors increase their quantities, then rationing reduces the fraction of a given investor’s demand that will be satisfied, so this investor raises her or his requested amount, which in turn makes others increase theirs.

If investors know of the bid rationing in advance, then they may select a rival market provider without this restriction, but if rationing takes them by surprise, then they may leave and publicly criticise the platform. Capital-raisers compare exchanges, so if many market providers inflate demand and the issuers pay attention to the level of oversubscription (instead of the fraction of campaigns reaching the target, which is what should matter to the capital-raiser), then the biggest inflator wins. Of course, platforms may not want to reveal unsuccessful campaigns (e.g. Funderbeam does not), so public data on the fraction of issuers who achieved their funding goal is unlikely to exist.

Theoretically, the feedback from bid rationing to increased quantity demanded could lead to infinite amounts requested. A countervailing incentive is that with positive probability, other investors do not honour their commitment to buy, in which case a given investor may be required to buy the amount (s)he demanded, instead of the lower amount (s)he actually wanted. If there is no commitment to buy (for example, on Funderbeam the bids are only non-binding indications of interest), then the danger of overcommitting is absent, so the rational choice seems to be requesting an infinite amount. Investors do not indicate infinite interest, so either they are irrational or some other penalty exists for outbidding one’s capability to pay.

Giving oneself tenure

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Senior academics tell juniors that an assistant professor does not have to get tenure at his or her current university, but “in the profession”, i.e. at some university. To extend this reasoning, one does not have to get tenure at all, just guarantee one’s ability to pay one’s living costs with as low effort as possible. Government jobs are also secure – not quite tenure, but close.
Economically, tenure is guaranteed income for life (or until a mandatory retirement age) in exchange for teaching and administrative work. The income may vary somewhat, based on research and teaching success, but there is some lower bound on salary. Many nontenured academics are obsessed about getting tenure. The main reason is probably not the prestige of being called Professor, but the income security. People with families seem especially risk averse and motivated to secure their job.
Guaranteed income can be obtained by other means than tenure, e.g. by saving enough to live off the interest and dividends (becoming a rentier). Accumulating such savings is better than tenure, because there is no teaching and administration requirement. If one wishes, one can always teach for free. Similarly, research can be done in one’s free time. If expensive equipment is needed for the research, then one can pay a university or other institution for access to it. The payment may be in labour (becoming an unpaid research assistant). Becoming financially independent therefore means giving oneself more than tenure. Not many academics seem to have noticed this option, because they choose a wasteful consumerist lifestyle and do not plan their finances.
Given the scarcity of tenure-track jobs in many fields, choosing the highest-paying private-sector position (to accumulate savings), may be a quicker and more certain path to the economic equivalent of tenure than completing sequential postdocs. The option of an industry job seems risky to graduate students, because unlike in academia, one can get fired. However, the chance of layoffs should be compared to failing to get a second postdoc at an institution of the same or higher prestige. When one industry job ends, there are others. Like in academia, moving downward is easier than up.
To properly compare the prospects in academia and industry, one should look at the statistics, not listen to anecdotal tales of one’s acquaintances or the promises of recruiters. If one aspires to be a researcher, then one should base one’s life decisions on properly researched facts. It is surprising how many academics do not. The relevant statistics on the percentage of graduates or postdocs who get a tenure-track job or later tenure have been published for several fields (http://www.nature.com/ncb/journal/v12/n12/full/ncb1210-1123.html, http://www.education.uw.edu/cirge/wp-content/uploads/2012/11/so-you-want-to-become-a-professor.pdf, https://www.aeaweb.org/articles?id=10.1257/jep.28.3.205). The earnings in both higher education and various industries are published as part of national labour force statistics. Objective information on job security (frequency of firing) is harder to get, but administrative data from the Nordic countries has it.
Of course, earnings are not the whole story. If one has to live in an expensive city to get a high salary, then the disposable income may be lower than with a smaller salary in a cheaper location. Non-monetary aspects of the job matter, such as hazardous or hostile work environment, the hours and flexibility. Junior academics normally work much longer than the 40 hours per week standard in most jobs, but the highest-paid private-sector positions may require even more time and effort than academia. The hours may be more flexible in academia, other than the teaching times. The work is probably of the same low danger level. There is no reason to suppose the friendliness of the colleagues to differ.
Besides higher salary, a benefit of industry jobs is that they can be started earlier in life, before the 6 years in graduate school and a few more in postdoc positions. Starting early helps with savings accumulation, due to compound interest. Some people have become financially independent in their early thirties this way (see mrmoneymustache.com).
If one likes all aspects of an academic job (teaching, research and service), then it is reasonable to choose an academic career. If some aspects are not inherently rewarding, then one should consider the alternative scenario in which the hours spent on those aspects are spent on paid employment instead. The rewarding parts of the job are done in one’s free time. Does this alternative scenario yield a higher salary? The non-monetary parts of this scenario seem comparable to academia.
Tenure is becoming more difficult to get, as evidenced by the lengthening PhD duration, the increasing average number of postdocs people do before getting tenure, and by the lengthening tenure clocks (9 years at Carnegie Mellon vs the standard 6). Senior academics (who have guarateed jobs) benefit from increased competition among junior academics, because then the juniors will do more work for the seniors for less money. So the senior academics have an incentive to lure young people into academia (to work in their labs as students and postdocs), even if this is not in the young people’s interest. The seniors do not fear competition from juniors, due to the aforementioned guaranteed jobs.
Graduate student and postdoc unions are lobbying universities and governments to give them more money. This has at best a limited impact, because in the end the jobs and salaries are determined by supply and demand. If the unions want to make current students and postdocs better off, then they should discourage new students from entering academia. If they want everyone to be better off, then they should encourage research-based decision-making by everyone. I do not mean presenting isolated facts that support their political agenda (like the unions do now), but promoting the use of the full set of labour force statistics available, asking people to think about their life goals and what jobs will help achieve those goals, and developing predictive models along the lines of “if you do a PhD in this field in this university, then your probable job and income at age 30, 40, etc is…”.