| Programming note: Money Stuff will be off tomorrow, Feb. 28, back on Monday. Well but why did you think Steven Seagal was a crypto expert? I asked the same question about Floyd Mayweather Jr. and DJ Khaled back in 2018, when they got in trouble with the U.S. Securities and Exchange Commission for promoting cryptocurrencies on social media without disclosing that they'd been paid to do so. I wrote: If [a] boxer or music producer posted to his Instagram "hey I just got into this amazing cryptocurrency investment opportunity and you should too" … I just … I mean … clearly it works, at least a little, but why? This is not a matter of taste but of expertise, and why does following a boxer on Instagram make you think he's an investing expert? "Man," you think, "if there is one thing that retired boxers know a lot about, it is selecting the initial coin offerings that are most likely to offer significant long-term value while complying with applicable laws." Perhaps getting punched in the head repeatedly over a period of years is an important part of the education of a crypto investor? I don't know how many times Steven Seagal has been punched in the head, but I assume the answer is "more times than I have." Kicked, too, probably; Wikipedia tells me that a mixed martial artist "credited Seagal for helping him perfect the front kick that he used to knock out Randy Couture at UFC 129 in May 2011." In any case now he is in trouble with the SEC for promoting a cryptocurrency without disclosing that he'd been paid to do so: The Securities and Exchange Commission today announced settled charges against actor Steven Seagal for failing to disclose payments he received for promoting an investment in an initial coin offering (ICO) conducted by Bitcoiin2Gen (B2G). The SEC's order finds that Seagal failed to disclose he was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotions, which included posts on his public social media accounts encouraging the public not to "miss out" on Bitcoiin2Gen's ICO and a press release titled "Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen." A Bitcoiin2Gen press release also included a quotation from Seagal stating that he endorsed the ICO "wholeheartedly." Look. I can find no fault with the SEC here. If Steven Seagal (whom the SEC tartly describes as "a U.S. national who is currently residing in Moscow, Russia") is going to secretly take money to promote a bad cryptocurrency, the SEC should absolutely take that money back and fine him. (It took the $157,000 that he actually got—not $1 million!—plus interest, and fined him another $157,000.) Makes sense! The B2G ICO was marked for death from the beginning, and although these undisclosed celebrity endorsements are under siege, they are hard to kill. The SEC was out for justice, and Seagal is not above the law. On the other hand come on: The SEC has also advised that, in accordance with the anti-touting provisions of the federal securities laws, any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. "These investors were entitled to know about payments Seagal received or was promised to endorse this investment so they could decide whether he may be biased," said Kristina Littman, Chief of the SEC Enforcement Division's Cyber Unit. "Celebrities are not allowed to use their social media influence to tout securities without appropriately disclosing their compensation." Whether he may be biased? Like, you read "Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen" and you think "oh hmm he must have objectively evaluated all possible securities investments and decided that this is the most profitable one, and given his vast experience in direct-to-video action movies I might as well put my trust in him"? Come on. Surely everyone knows that "Brand Ambassador" means "I have been paid to promote this thing." As a matter of securities law sure I suppose you might want people to disclose "the nature, scope, and amount" of compensation, but as a matter of consumer protection absolutely everything any reasonable investor would need to know about Bitcoiin2Gen is contained in the sentence "Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen." That is a model of securities disclosure; it is brief, readable, clear, and tells you—as no 10-K does—exactly how much the security is worth. If someone offered you an investment in a security, and you were allowed to know either (1) all of the information that public companies have to file under SEC rules, audited financials and management discussion and analysis and risk factors and everything else, or (2) that Zen Master Steven Seagal had become the brand ambassador of that security, clearly the latter is more informative and also takes way less time to digest. The SEC should encourage this sort of thing! Why wade through white papers and source code when you could just be like "oh that's the Steven Seagal crypto, hard pass"? I am not saying that you could build a whole securities disclosure regime around this concept; plenty of securities do not have Steven Seagal as a brand ambassador, and some of those are better than others. But the only securities disclosure regime that you need for cryptocurrencies touted by Steven Seagal is to say that they are cryptocurrencies touted by Steven Seagal. The total value of all Bitcoiin2Gen tokens in circulation was about $9,613.90 as of 10 a.m. today. How're things at SoftBank? "SoftBank's Rajeev Misra Used Campaign of Sabotage to Hobble Internal Rivals," it says here, and who among us? I am constantly unplugging Tara Lachapelle's computer in order to hinder her work and make myself look better by comparison. Still I feel like the ordinary way to undermine your coworkers is by sabotaging their work, or by gossiping about them with your other coworkers, or by talking trash about them to your mutual boss. What is remarkable about Misra's alleged campaign against "Nikesh Arora, who was once heir apparent to Mr. Son as chief executive, and Alok Sama, a deputy to Mr. Arora who grew to work closely with Mr. Son on big deals," both of whom have left SoftBank Group Corp., is that he didn't take things directly to SoftBank head Masayoshi Son. Instead he allegedly tried to get the press, and SoftBank investors, to exert pressure on his enemies, and in pretty baroque ways. So the claim here is that Misra hired a guy named Alessandro Benedetti to take care of his rivals at work, and Benedetti hired a private intelligence firm to investigate them, and the private intelligence firm hired a public relations firm to get its investigations into the press, and the PR firm hired a freelance reporter to write them up in the press.[1] "At SoftBank, the article and others that resulted were mostly seen as noise." So Benedetti apparently tried something else, asking "law firm Susman Godfrey LLP to represent him as an investor making claims about SoftBank" and Misra's rivals. Susman Godfrey said no, and if you need a law firm to do dark weird stuff there is only one name to call: The law firm declined to take the work, and Mr. Benedetti then went to Boies Schiller Flexner LLP. Mr. Benedetti arranged for Mr. Giannakopoulos to be the shareholder nominally behind the claims, but stayed closely involved, according to people familiar with the events Well sure yes right Boies Schiller, of course, of course. In January 2016, a Boies Schiller lawyer sent a public letter questioning Mr. Arora's investments in Indian startups and asking for an investigation of alleged conflicts of interest. Mr. Arora's "past conduct also demonstrates his willingness to put his personal interests—and those of his partners—above those of the companies that have employed him as a senior executive," the letter said. More letters followed throughout 2016 from Boies Schiller and a law firm that succeeded it, prompting SoftBank's board to launch an investigation into Mr. Arora, which found the allegations to be false. Over time, critical shareholder letters began to focus on Mr. Sama as well. Also, why not: That month, Mr. Benedetti sent a team to Tokyo to set up the so-called honey trap, in which one or more women would lure Mr. Arora to a hotel room rigged with cameras in an attempt to obtain compromising images, people familiar with the effort said. The mission failed: Mr. Arora didn't fall for the ploy. Misra and SoftBank deny all of this—"These are old allegations which contain a series of falsehoods that have been consistently denied"—and one could speculate about the fact that this story comes a few weeks after Elliott Management Corp., the notably tough activist investor, built a stake in SoftBank and started arguing for more share buybacks and better governance. You live by the private investigators and mobilizing outside investor pressure against your enemies, you die by the etc. Speaking of which! Mr. Benedetti felt shortchanged. In recent months, his relationship with Mr. Misra has deteriorated. Associates of the Italian businessman said he has told them he recorded conversations in which Mr. Misra detailed his plans to weaken his SoftBank rivals. I have never worked at an organization in which everyone was constantly and consciously collecting blackmail material against their colleagues, though I have watched television shows like that and found them pretty enjoyable. I just wonder how anyone gets any work done. Doesn't this take time? I suppose the model is, like, "blitzscaling plus tournament." SoftBank's ability to pump billions of dollars into any startup it chooses, through its giant Vision Fund, makes its investments, to some degree, self-fulfilling; once SoftBank picks a winner in an industry, that company just inevitably wins. (Obviously this is not true, but you could at some point have roughly believed some approximate version of it.) So picking the right investments, structuring deals well, etc., is not a particularly important aspect of a senior Vision Fund executive's job, and anyway Son himself seems to pick a lot of the investments whimsically and without consulting his lieutenants. Meanwhile the amounts involved are enormous, so sitting near the top of the Vision Fund is very lucrative. The prize is huge, the advantage of doing a good job is non-obvious, so you're left with hiring private investigators to entrap your rivals. Quoine Here is a dumb computer glitch. Quoine is a cryptocurrency exchange in Singapore that has its own algorithmic market maker: Anyone can post orders on Quoine, but Quoine also posts its own orders to provide liquidity on its platform. As far as I can tell not a lot of other people posted orders. (I am drawing most of the facts from Dominika Nestarcova's writeup from last year.) But a trading firm called B2C2 did. B2C2, like Quoine itself, posted orders algorithmically. Here's how the algorithms worked: - Quoine's market-maker algorithm basically looked at prices on other crypto exchanges to come up with the bid and offer prices it posted on Quoine's exchange.
- B2C2's algorithm basically looked at bids and offers posted on Quoine to come up with the bid and offer prices it posted on Quoine.
Fine. Quoine's strategy is sensible in a world of fragmented liquidity; if you run a crypto exchange, the price you offer for Bitcoin should be more or less the price that Bitcoin trades for elsewhere. B2C2's strategy is sensible if you are a market maker on a platform. Things could go wrong. Here's how the algorithms handled things going wrong: - If Quoine's algorithm couldn't find prices on other crypto exchanges, it stopped posting orders on its platform.
- If B2C2's algorithm couldn't find bids and offers on Quoine, it posted bids and offers at what it called "deep prices." These are just very-far-away-from-market prices where B2C2 would in all cases be happy trading. In other markets they are sometimes called "stub quotes": A market maker who does not want to trade, say, Microsoft stock will bid $0.01 and offer it for $9,999.99. In this case, for the Bitcoin/Ether cross, where the going rate at the time was roughly one Bitcoin for 25 Ether, B2C2's deep prices were buying 10 Bitcoins for one Ether, or selling 0.00001 Bitcoins for one Ether.
Both of those strategies are … you know, they're fine I guess; "stop posting quotes" and "post stub quotes" are both ex ante reasonable reactions to not being able to get market data. But weird stuff can happen. They interacted poorly. What happened one day in April 2017 was: - Quoine's algorithm broke. As Nestarcova put it: "Certain Quoine login passwords for several critical systems had to be updated for security reasons, but by an oversight necessary changes to the Quoter Program were not implemented."
- So it did what it did when it broke: It stopped quoting.
- B2C2's algorithm, therefore, also broke: "The volume of traders got depleted and the order book became thin."
- So it did what it did when it broke: It posted deep-price quotes.
- Quoine is not just a market maker but also an exchange that offered margin trading. Several margin traders "were trading on Quoine the ETH/BTC market using ETH borrowed from Quoine." (That is, they were short Ether/long Bitcoin, and had borrowed Ether to put on that trade.)
- With thin weird trading, the price of Bitcoin on Quoine dropped, and it looked like those traders did not have sufficient margin.
- So Quoine blew out their accounts, selling their Bitcoins for Ether.[2]
- To the only available buyer on the platform, B2C2.
- At its deep price of 10 Bitcoins per Ether.
All of this, to be clear, happened algorithmically; nobody made any decisions during any of it. Everything just happened as it was programmed to happen. B2C2 ended up buying about 3,092 Bitcoins (worth about $27.5 million at today's price) for 309 Ether (worth about $72,000 now). "Next morning, when Quoine's CTO discovered the trades, he considered the exchange rate abnormal and reversed the trades without giving notice to the parties." B2C2 sued Quoine in a Singapore court and won, Quoine appealed, and this week B2C2 won again: The Court of Appeal has ruled in a landmark case that virtual currency exchange operator Quoine must pay damages for wrongfully reversing a number of transactions on its platform. The apex court yesterday rejected Quoine's argument that it was entitled to unilaterally cancel the seven orders - placed by trader B2C2 to sell ethereum for bitcoin - on the basis the transactions were a mistake. Quoine had argued that the parties who transacted with B2C2 were under the mistaken belief that the trades were at market price and that B2C2 knew of this mistake. One lesson of the story is about the legal doctrine of "unilateral mistake." Basically if there's a contract—like a stock or crypto trade—and one side is wrong about a key term of the contract, and the other side knows that the other side is wrong and enters into the contract anyway, then (sometimes) the party who was wrong can get out of the contract. (This sounds vague, and is, and is surely not legal advice, in Singapore or elsewhere.) Here it is perhaps plausible to say that Quoine (or rather its margin customers) sold Bitcoins at the wrong price, and so was mistaken. The question is whether B2C2 knew that it was taking advantage of the mistake. B2C2 did not, at the time of the trade, know anything; its algorithm was just trading according to its instructions. But the question is then, when B2C2 wrote the algorithm, and put in the deep-prices fail-safe, was it thinking "haha, if liquidity goes away we will take advantage of suckers by buying at the wrong price," or was it thinking "uh oh, if liquidity goes away we will protect ourselves by putting in really safe quotes"? It seems like a bit of a weird thing to inquire into, the state of mind of an algorithmic trading system. But if the law requires an inquiry into the state of mind of a trader, and if all of the traders are robots, then that is what you get. The other lesson is, you know, don't design your system this way. Not so much B2C2—B2C2's approach of putting in deep-price stub quotes in weird times was plausible and, in this case, hugely lucrative[3]—but Quoine. You could have a specific rule like "if your feed of outside prices breaks, halt trading on your platform," which might be a better rule than "if your price feed breaks, stop making markets but keep allowing trading at weird prices." Or you could have a more general rule like "don't allow trading at weird prices"; real-world exchanges often do this with circuit breakers that halt trading if the price moves by more than a pre-set percentage. Or you could even have a rule like "if trades happen at weird prices then we will reverse them manually after the fact"—not a rule of the algorithm but a rule of the stock exchange itself. Some stock exchanges have rules like this, and the important thing is that they are disclosed in advance. B2C2 won here because Quoine broke the trades in an ad hoc way; its rules didn't allow it to do this and it did it anyway. We talked last week about an exploit at crypto platform bZx, which has some basic similarities with this situation. The problem in both cases is a combination of (1) fragmented liquidity at many different crypto exchanges, which do not always "see" the market price at other exchanges and therefore sometimes execute trades at weird and off-market prices, and (2) a lack of fail-safes and backups and error protocols. Regular finance is run by computers, but everyone realizes that the computers sometimes do weird things, so there are crude guardrails to prevent them from doing anything too weird. Crypto finance tends to trust absolutely in the power of immutable code and the logic of markets, and so if the computerized markets do real weird stuff then that's just allowed. Elsewhere in algorithms Here's a portfolio of stocks weighted by how often they are mentioned on r/wallstreetbets, the Reddit forum that we discussed yesterday and that seems to be able to move stock prices. Reader James Kardatzke emails: Something that's been posted several times on the subreddit over the past few weeks is a live heatmap that tracks the performance of an equity index with stocks weighted based on how often they were mentioned on WallStreetBets the previous day. Of course, this portfolio is not actively traded, but you can imagine how it would be possible to turn the board's single-stock speculation into a passive index vehicle. I mean if it updates every day it's not exactly a passive index vehicle, and if the stocks touted on WallStreetBets often move at the open on coordinated buying activity, then tracking r/WSB on any sort of lag will miss a lot of performance. Still just go with it. You could build an exchange-traded fund that tries to mirror popularity on WallStreetBets. (The ticker RWSB seems to be available.) Then people who want to invest passively in stocks favored by Reddit could do that. I wrote yesterday, about r/WSB, that it reflects the barbell future of investing: "Sober responsible people would invest passively in broad market indexes, stocks would mostly move in lockstep with broad macroeconomic trends, and the single-stock price action would come from weird online hobbyist speculation." But what if you somehow want both at once? Passive, but for weird online hobbyist speculation? I bet that ETF would do well. By the way I certainly hope that some real professional quant investors are using a "popular on Reddit" signal for their trading. I always read about quants using "Twitter sentiment" signals, and anecdotally it sure seems like r/WSB sentiment is more predictive! Things happen Aramco Starts Early Preparations for an Overseas Listing. Expat bankers head for exits to flee coronavirus. At Wells Fargo, One-Time Dimon Protege Hires Dimon's Son-in-Law. In the Epic Battle Between Brookfield and Blackstone, Who Wins? How Monzo brought Silicon Valley's 'wild ideas' to Britain's staid banking system. Aurelius Renews Feud Over Sycamore's $1 Billion Nine West Payday. Virgin Galactic Sinks After Two of Three Analysts Cut Ratings. Tough Job Interviews Make Candidates More Likely to Take the Offer. CDC facial hair chart. Pope Francis asks followers to give up trolling for Lent. Text Ray Dalio. Earth has acquired a brand new moon that's about the size of a car. Big dog becomes mayor of small Colorado town. China prepares 100,000 ducks to battle Pakistan's locust swarms. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] To be clear, PR people are not supposed to pay journalists to write articles! The journalist "said the notion he received a success fee was 'completely and utterly false.'" [2] Nestarcova writes: "These trades were carried out despite the fact that the margin traders did not have sufficient BTC in their trading accounts to actually complete the transactions. For example, one trader's account contained only approximately 13.53 BTC but it was debited with over 3000 BTC (this would not have happened if Quoine had a program to check whether there were sufficient available assets, which it did not at the time)." [3] One could quibble. It's important to know what you own. If you buy 3,000 Bitcoins on Quoine, and then hedge by selling 2,000 Bitcoins on another platform, and then Quoine tells you that you don't actually have the 3,000 Bitcoins, and you litigate for three years (and even now damages are uncertain), then you are in a difficult position; you've sold Bitcoins that you may or may not have. "Don't put in orders that will lead to trades that an exchange will break" is probably a good risk-management rule. On the other hand just on the facts of the trade here they seem to have done well; "trades that an exchange will break" often means "stupidly lucrative trades." | 
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