On Manipulation of the Commodities Market

[OOC: Scroll down to Section IV for the Market Manipulation part]

[Working draft, University of Saikamon Journal of Economics, 1,1, YC116]

On Manipulation of the Commodities Market of New Eden

Introduction

The markets of New Eden are vulnerable. This is not because the economy is in such a state as to oscillate between cycles of boom and bust without warning–this is the natural condition of a largely free market system. The vulnerability exists within the means of the financial control mechanisms itself, leading ultimately to economic inefficiency and by extension, the possibility of a large-scale destabilization of New Eden’s markets.

But what are the major forms of trade in New Eden? How does an individual generate ISK in the pursuit of profit by not producing anything? This is an age-old question that deserves visitation. There are several popular market trading techniques in New Eden, but I will discuss only three of them–all of which are legitimate–and then a fourth, which is not.

I. Arbitrage

It is a well-known fact that the dissemination of real-time market data in individual regions of space is limited to their respective regions of origin. In other words, a trader in Hek cannot know the prices of goods in Jita, nor can the broker in Amarr be aware of the prices in Dodixie. This should come as no surprise to the heads of logistics departments of major coalitions, alliances, and corporations–crossing the border from one region to another can lead to a vastly different market landscape.

Although capsuleer-driven technology has progressed to the point of providing the semblance of current market data across regional divides, these services are not in true real-time. As a result, many traders–especially those with access to freight services–take advantage of the regional divides to generate profit from the difference in prices between different markets. This form of trade is called “arbitrage.”

This is perhaps the easiest form of trade to provide an example. Let us say that there is a capsuleer with one billion liquid ISK. This same capsuleer, taking advantage of the differences in regional market data and seeking to generate profit, purchases one billion ISK worth of the popular “Hobgoblin” drones in Jita for 10,000 ISK each. Let us say that they have also identified the proper market for sale either by scouting ahead or through direct communication with an agent, where the value of the Hobgoblin drone is 14,000 ISK. I will leave it up to the reader to do the elementary arithmetic, but factoring in transaction costs, reward for transportation, and other expenses, the difference in price multiplied by the number of drones is the profit. That is, where “P” is profit:

P = [(|Value of Drones in the Forge – Value of Drones in Region 2|)(Quantity of Drones)] – Expenses

The risks associated with arbitrage stem from the act of transportation. The longer the amount of time between obtaining goods from the supply region and moving those goods to the demand region, the greater the possibility of those goods deceasing in value. Additionally, the prevalence of freighters, jump freighters, and haulers being intercepted and destroyed near market hubs further adds risk.

II. Margin Trading

Margin trading removes the risk associated with arbitrage by simple virtue of taking place within a station. The margin trader–or daytrader–has little to no interest in what happens outside of their market hub (unless, of course, all incoming traffic is interdicted, in which case their market disappears). How then, do margin traders make their ISK?

In New Eden, all goods on the market are divided into very clear areas of supply and demand: sellers list their goods, buyers list orders. The margin trader takes advantage of the difference in price between supply and demand–this difference is called the “margin.” Essentially acting as a “middle-man” in transactions, the margin trader lists buy orders, awaiting for items to be sold directly to them by impatient suppliers. Once the item is in their possession, they list it as one of the sell orders. In this way, they provide the illusion that they are the producer themselves when they have not actually constructed anything!

The finer points of margin trading are covered in-depth elsewhere on the holonet, but it is important for this paper to identify key aspects. Although there are many strategies applicable to margin trading, the most common follows a combination of two important metrics. Firstly, where “M” is the percentage margin:

M = Lowest Sell Order/Highest Buy Order

A larger “M” value makes a single item more attractive. Conversely, a lower “M” value makes an item less attractive.

The second metric is volume. Volume is the amount of goods traded, encompassing both buy and sell orders. As such, many margin traders are on a constant search for the golden item: One that possesses a large “M” value and trades in high volume. These two traits make margin traders especially vulnerable to market manipulation.

III. Speculation

There are many voices in New Eden that decry speculators. “Speculators are responsible for the increase in price!” or “Speculators have crashed the market!” Let us begin by analyzing what it means to be a speculator.

Speculation is more an art form than it is hard-data trading. It requires good instincts, patience, and, preferably, some sort of inside knowledge on major events in New Eden. A speculator identifies an item, makes a prediction of where the value of the item will be at some point in the future, then purchases the item for sale at that time.

Returning to our trader from the first example, let us say there is a capsuleer with one billion liquid ISK. Let us also say that they have a source within a major coalition that the coalition’s new fleet doctrine will be Armored Ravens (to my concerned readers, I understand that this is as unlikely as it is fanciful). Additionally, their source has indicated the exact fittings required for the Armored Ravens. Astutely, our capsuleer purchases all of the items they can and then waits. When the big day comes, the value of the items skyrocket as suppliers struggle to meet demand–but our astute capsuleer is prepared, listing their own stockpile as soon as the prices reach a point of their liking.

The risks associated with speculation are immense. At any point between purchase and resale, the coalition’s leadership could rethink their Armored Raven doctrine and alter it–or worse, do away with it completely! Bad speculators are therefore driven out of the market while good speculators can serve as indicators for producers for upcoming demand.

IV. Market Manipulation

Having addressed three major forms of trade in New Eden, I would like to focus now on market manipulation. Market manipulation takes many forms in New Eden–a concerted effort to cut off a system from all supply, for example, is a form of market manipulation.

But even more sinister than a blockade is the exploitation of the recording mechanisms associated with the Secure Commerce Commission itself. I have discovered this particular vulnerability in their software and I hope that steps will be taken, if not within the Empire that I call my home, at the very least in some corners of New Eden to counteract this particular challenge to free market economics.

The process is simple. Every transaction on the open markets (rather than the contract market) of New Eden leaves behind a record for calculation into that day’s set of metrics–five-day average price, twenty-day average price, volume. Herein lies the vulnerability. Every transaction on the open market is taken into consideration.

The implications of that statement are not only clear, but frightening. There are no protections to consumers, no protections to suppliers, for every transaction on record looks legitimate. But let us take a closer look.

Let us say we have a capsuleer with one billion liquid ISK. This capsuleer identifies a market to manipulate. For this example, let us say, once more, the ubiquitous Hobgoblin drone. Where the trader practicing arbitrage purchases the drones to move them, where the margin trader lists orders to resell in the same market, and where the speculator purchases to sell in the future, the market manipulator merely takes advantage of the weakness of the SCC’s system by utilizing a combination of methods. This is easiest to illustrate in step form:

1. Purchase one billion ISK worth of Hobgoblins,

2. Create a buy order for that quantity of Hobgoblins,

3. Fill that buy order with their own supply of Hobgoblins.

4. Having lost nothing except through the transaction tax and broker’s fee, repeat.

These steps have tremendous impact. One, a manipulator can affect volume. Two, the manipulator can affect average price. The record for the regional market would then see an increase in demand for Hobgoblins and the average price for Hobgoblins–where no true demand exists.

A trader practicing arbitrage would import Hobgoblins from elsewhere in New Eden to take advantage of the difference in price. A margin trader would see the value increasing on a heavily traded item and thus begin to set their own buy orders. For the manipulator, taking a page out of the speculator’s book, all they need to do is wait until the buy orders reach a point at which they can sell their stockpile of Hobgoblins at profit and then walk away from the market as if nothing happened.

Suddenly, demand falls off and the market crashes, but not before many unsuspecting traders and manufacturers fall victim to the market manipulator.

Conclusion

I hope that my identification of market manipulation in regards to the commodities market will be answered by the SCC. New Eden’s markets are vulnerable.

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