Financial News

[StrangeSox]

In my view, it's fraud and theft. It transferred millions of dollars from Californian energy users to a handful of people at JPM. No useful social purpose is present, only a handful of people making themselves wealthy while not actually contributing anything to anyone at best and actively harming the economy at worst.

[Balta1701]

California doesn't need to be an ISO. They could be a part of the WECC and take almost all of this nonsense out of play. We rely on supply and demand and traders and analysts to make decisions as to how to best serve our own native loads. We allow marketers to come and play too. Part of the problem is the CAISO is almost entirely controlled by software systems that are easily fooled.

Why do you think the original deregulatory bill that created the CA ISO did things the way that they happened? Because the deregulatory bill was bought and paid for by the people who would benefit most from the deregulation.

[iamshack]

In my view, it's fraud and theft. It transferred millions of dollars from Californian energy users to a handful of people at JPM. No useful social purpose is present, only a handful of people making themselves wealthy while not actually contributing anything to anyone at best and actively harming the economy at worst.

I can understand that you would view it that way.

 

But it really is much more complex than that. California has determined that the best way to dispatch electricity to their customers is to create a complex system of rules controlled by software systems that incentivize others to behave in certain ways. They must do this because their current infrastructure and resource pool is not self-sufficient. They have made a conscious decision to create this complex system, controlled by software instead of humans. They invite counterparties to participate and utilize the optimal business acumen possible, because they need more participants to increase their resource pool.

 

Counterparties transfer millions of dollars from California energy users all the time, without accomplishing any social purpose, using methods which CAISO determines are well-within the rules. It is only when one of these counterparties finds a way to do this which the CAISO did not foresee, that they become angry. I don't see how you can draw a moral or ethical line in the sand based on the difference of whether CAISO contemplated an action or did not. That alone has no bearing on morality or ethics; it is only a failure of the CAISO to create the best rules.

[iamshack]

Why do you think the original deregulatory bill that created the CA ISO did things the way that they happened? Because the deregulatory bill was bought and paid for by the people who would benefit most from the deregulation.

I can't pretend to have any knowledge of the history of that...I'll defer to you on that one.

 

Who are you saying supported the deregulation?

[Balta1701]

You say "California has determined"...but you're side-stepping my point. That determination was made because the utilities bought and paid for that system so that it could be easily gamed. The existence of the CAISO and the ability to manipulate it was built into the system when it was designed and has been protected by those same utilities using their political contribution arms.

[iamshack]

You say "California has determined"...but you're side-stepping my point. That determination was made because the utilities bought and paid for that system so that it could be easily gamed. The existence of the CAISO and the ability to manipulate it was built into the system when it was designed and has been protected by those same utilities using their political contribution arms.

So you are saying that SCE and PG&E are the ones profiting most of the CAISO?

[Balta1701]

I can't pretend to have any knowledge of the history of that...I'll defer to you on that one.

 

Who are you saying supported the deregulation?

It's not just "Supporting", you can get lots of people who will line up behind supporting deregulation. It's much more "the ability to insert obscure clauses that allow you to game the system but that no one else can care about until the law is in place" that is hurting here.

[StrangeSox]

"Operating within the rules" is not a sufficient basis for morality imo. As you say, whatever rules CAISO sets up is not the basis for morality.

 

If JPM was intentionally manipulating the market, then all they did was suck up hundreds of millions for themselves. There was no market purpose served, nothing added, no economic gain. It's not enough to say "sure, we gamed the system, added zero value, provided zero services, but we found a loophole!" That doesn't justify their actions and points to something inherently flawed in the system where such actions are rewarded.

[iamshack]

It's not just "Supporting", you can get lots of people who will line up behind supporting deregulation. It's much more "the ability to insert obscure clauses that allow you to game the system but that no one else can care about until the law is in place" that is hurting here.

I think you are off-base here, Balta. The original CAISO rules, maybe...but since then, they have implemented the MRTU, which was designed to stop all the abuse. The CPUC was heavily involved in implementing that.

[Balta1701]

I think you are off-base here, Balta. The original CAISO rules, maybe...but since then, they have implemented the MRTU, which was designed to stop all the abuse. The CPUC was heavily involved in implementing that.

And it took JPM what, a couple months to figure out how to cheat that technology upgrade?

[iamshack]

"Operating within the rules" is not a sufficient basis for morality imo. As you say, whatever rules CAISO sets up is not the basis for morality.

 

If JPM was intentionally manipulating the market, then all they did was suck up hundreds of millions for themselves. There was no market purpose served, nothing added, no economic gain. It's not enough to say "sure, we gamed the system, added zero value, provided zero services, but we found a loophole!" That doesn't justify their actions and points to something inherently flawed in the system where such actions are rewarded.

Again, I understand that...but the rules are designed in a way where this line you are drawing is very much blurred. CAISO will pay you for doing all kinds of things that really don't serve much of a legitimate market purpose, but instead, serve their silly system because it has so many flaws.

 

For instance, they will pay me money to take energy out of California even when they desperately need energy, because they don't have adequate infrastructure in place to accommodate the flows of electricity necessary. There is no market purpose served here, only a very real logistical purpose which exists only because of their inadequacy.

 

I know you will argue that relieving congestion is serving a market purpose, but then I would argue that JP Morgan was serving a market purpose by having it's units online, even if they manipulated the odds of them being dispatched by changing their bids in the RT market. If the energy was really needed, they would be able to dispatch it, whereas they would not have had they not been incentivized to have it online.

[StrangeSox]

And it took JPM what, a couple months to figure out how to cheat that technology upgrade?

 

It took them 10 days to figure out a new work-around to the rules changes.

[iamshack]

And it took JPM what, a couple months to figure out how to cheat that technology upgrade?

I don't understand what this has to do with your original point. Are you arguing that JPM supported the MRTU so they could game it?

[iamshack]

It took them 10 days to figure out a new work-around to the rules changes.

10 days to find another loophole, but that was one that already existed.

 

The MRTU was implemented Q1 of 2009.

 

The rule change you are referring to was an emergency filing with FERC to eliminate the first loophole that JP exploited. The second always existed, it just took a different impetus to cause JP to find it.

[StrangeSox]

Again, I understand that...but the rules are designed in a way where this line you are drawing is very much blurred. CAISO will pay you for doing all kinds of things that really don't serve much of a legitimate market purpose, but instead, serve their silly system because it has so many flaws.

 

For instance, they will pay me money to take energy out of California even when they desperately need energy, because they don't have adequate infrastructure in place to accommodate the flows of electricity necessary. There is no market purpose served here, only a very real logistical purpose which exists only because of their inadequacy.

 

I know you will argue that relieving congestion is serving a market purpose, but then I would argue that JP Morgan was serving a market purpose by having it's units online, even if they manipulated the odds of them being dispatched by changing their bids in the RT market. If the energy was really needed, they would be able to dispatch it, whereas they would not have had they not been incentivized to have it online.

 

I admittedly do not know how these energy markets operate. Perhaps they're inherently flawed. But morality doesn't derive from the rules of the system. I don't think there's a blurry or even questionable line here. Assuming that the allegations are true, they deliberately manipulated the market. They knew that they never truly intended on making honest bids and supplying electricity. I don't see that as equivalent to a possibly flawed system meant as a work-around for insufficient infrastructure.

 

Is that a set of actions we should really accept as moral? That anyone who can find loopholes around the rules to siphon off tens of millions of dollars while providing absolutely nothing in return is acting in a moral manner?

[StrangeSox]

10 days to find another loophole, but that was one that already existed.

 

The MRTU was implemented Q1 of 2009.

 

The rule change you are referring to was an emergency filing with FERC to eliminate the first loophole that JP exploited. The second always existed, it just took a different impetus to cause JP to find it.

 

Having to come up with ad hoc patches to the original deregulation would seem to support Balta's point.

[Balta1701]

I don't understand what this has to do with your original point. Are you arguing that JPM supported the MRTU so they could game it?

I'm arguing that the agencies writing the regulations are completely corrupted and thus continue to write regulations that have loopholes their contributors/employers can exploit.

 

it's no accident that the head of the CPUC is the former head of Southern California Edison. That's how it's supposed to work. The people writing the rules write them to protect anyone other than the consumer.

[iamshack]

Having to come up with ad hoc patches to the original deregulation would seem to support Balta's point.

I'm not trying to be a jerk, but these rules that are getting manipulated are not rules that are inherently moral or ethical. They are rules designed to send the most efficient price signals to incentivize counterparties to participate in the CAISO. Because they are artificial and controlled by software systems, humans find scenarios to exploit them. Just like lawyers find ways to exploit loopholes in the law. Should lawyers be fined for exploiting legal loopholes?

 

When you talk about the manipulation going on here, it is far more complex than I think either of you recognize. These are rules which govern the supply and flow of energy and how the computer systems control those rules. It is not as simple as PG&E or SCE saying "we support a proxy payment for covering startup costs and minimum run costs because we know we can game them." These are rules created by electrical engineers and economists who are trying to artificially design a system which will produce the most efficient and reliable dispatch of energy to California.

 

Smart people will always find ways to profit off that. Drawing ethical or moral lines in the sand is much more complex than you guys are making it out to be.

Edited July 19, 2012 by iamshack

[iamshack]

Having to come up with ad hoc patches to the original deregulation would seem to support Balta's point.

It has nothing to do with deregulation. The WECC is deregulated and we don't have these instances of manipulation.

[iamshack]

One more thing...I went to a FERC conference in DC back in March, put on by Skadden & Arps, and they actually had an economist speak, who was heavily involved in the creation of the CAISO market structure. He said that if the FERC continues down the current path of penalizing counterparties for manipulation when they were just operating under the existing rules, that the markets would collapse.

[southsider2k5]

Say bye-bye to Knight

 

http://online.wsj.com/article/SB1000087239...=googlenews_wsj

 

Knight Capital Group Inc. KCG -48.85% said electronic-trading glitches in its system that caused price swings in dozens of stocks this week are likely to cost the brokerage firm $440 million.

 

Knight said it is pursuing alternatives, such as financing or strategic business moves, to "strengthen its capital base."

 

The announcement came a day after Knight's shares dropped 33% amid worries the fallout from technology problems would destabilize the firm by spooking customers that pay it to handle billions of dollars in trades each day. Knight's shares were down 43% in premarket trading on Thursday.

 

The Jersey City, N.J.-based brokerage firm, one of the biggest players in the U.S. stock market, on Wednesday morning warned big Wall Street trading firms to route orders elsewhere due to a "technology issue" at Knight. Problems surfaced when U.S. markets opened and dozens of stocks showed unusual price moves as trading volumes surged.

 

The problems, involving apparent errant orders sent by Knight's system to the New York Stock Exchange, spurred a review of trading in nearly 150 stocks and a regulatory inquiry into the latest computer-driven trading snafu to roil markets.

 

The New York Stock Exchange canceled trades in six stocks that experienced the most pronounced price swings—of more than 30% from their opening price—between 9:30 a.m. and 10:15 a.m. Wednesday morning.

[StrangeSox]

Ain't modern finance capitalism grand?

[southsider2k5]

Ain't modern finance capitalism grand?

 

The funny part is that as usual, there are plenty of rules that should have prevented what it sounds like actually happened.

[StrangeSox]

They'll get around to figuring out this one as soon as they figure out the "flash crash" from a couple of years ago.

[southsider2k5]

They'll get around to figuring out this one as soon as they figure out the "flash crash" from a couple of years ago.

 

Pretty much. Though with this being localized to one firm, it won't be nearly the disaster regulatoraly that the flash crash was. Even if they survive, they will get the distinction of being the first firm to get its ass kicked for the new market access rules.