Friday, January 04, 2008

$100 shenanigans

A good start to the year for the rational agent hypothesis, with the oil price hitting the $100 benchmark as a result of what appears to be a less than entirely rational act of self-aggrandisement.

As the Guardian reports:
Richie Arens, an independent trader who runs a brokerage called ABS, bought 1,000 barrels for $100 on Wednesday at a time when the prevailing price was $99.53. The price instantly settled back, although it jumped over $100 again yesterday, hitting $100.09 during the day before settling to end at $99.18.
Wednesday's trade appears to have made an instant loss of at least $500 - but market watchers believe Arens was motivated simply by being the first person to buy at more than $100. His actions have attracted criticism from experts who say that it risked artificially triggering automatic "stop orders" placed by others in the event that the price hit $100.
Stephen Schork, editor of the Schork Report market intelligence service, said: "This could have triggered a massive artificial rally. It creates a doubt that these kind of shenanigans could be commonplace - you begin to question the validity of prices and to ask 'are these markets really working?'"

OK. so one could argue that it can be rational to incur a financial cost in return for an enhanced reputation, but I'd love to see the utility function that could codify this. More generally, it really doesn't seem entirely rational that such attention should be paid to a price or index hitting any particular number - psychology aside, $100 isn't any more significant that $98.75 or any other price. Reminds me of other apparently paradigm-changing round-figure events, such as the Nasdaq hitting 5000 back in the day.

The Economist meanwhile looks at the broader implications of the $100 barrel. It ain't pretty. Happy new year, all.



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