From Bloomberg Opinion's Money Stuff, September 17:
....Compute futures
I wrote once about egg market manipulation:
There’s a big market (egg producers selling eggs to supermarkets etc.), and there’s a small market (egg producers selling extra eggs to each other on an electronic exchange). The price in the small market determines the price in the big market. Participants in the small market are also participants in the big market. You can spend a little money in the small market to move the price, which can make you a lot of money in the big market.
That’s the core idea of market manipulation: You find some small illiquid market that determines the price of some much larger and more liquid market. You buy $100 million worth of stuff in the large liquid market, without moving the price much. Then you buy $1 million worth of stuff in the small illiquid market, causing the price — in the illiquid market, and also in the liquid one — to double. You sell your stuff in the large liquid market for $200 million (it’s doubled), again without moving the price much. Then you sell your stuff in the illiquid market, maybe driving the price down to zero, but so what: You lose $1 million on your small-market manipulative trades, and make $100 million on your large-market manipulated trades.
In general, this is hard to pull off, because what markets have structures like that? Why would some giant liquid market depend on some small illiquid market for its pricing? There are a few salient examples — eggs, Indian index options, interest-rate swaps in the 2000s — but they’re kind of weird.
But maybe that’s the wrong way to think about it. The other day, I quoted a judge’s opinion in an insider-trading lawsuit, saying:
This is modern trading — where algorithms, AI agents, and career traders are all jockeying, minute by minute, for the newest hot trade, using analyst information, market trends, news reports, scuttlebutt from online forums, and other tea leaves to make split-second decisions.
You could tell a story like this: The marginal prices of stocks are set by, you know, four hedge funds; they are set by “algorithms, AI agents and career traders” reading “tea leaves to make split-second decisions.” The stock market is big and liquid. But the tea leaf market is weird and small. The marginal price setters in stock markets are looking to some data sources to set prices, and those data sources might be small and niche and manipulable, and if you can manipulate them you might have a big impact on stock prices.
Arguably the biggest market in the world right now is, like, “AI.” Trillions of dollars of stock market capitalization, of data-center financing, of expected capital expenditures and revenues, all depend on the path of artificial intelligence adoption. The modern debt market is basically built on the value of computer chips as debt collateral. If there is news suggesting that AI progress will be faster or slower than expected, that causes huge shifts in value.
Meanwhile we’ve talked occasionally about compute futures. Several exchanges are working on developing financial futures products to price and hedge the expected future cost of computing power. This has an obvious use case in the AI buildout; I wrote once:
If you can lock in the future price of computing capacity, then building computing capacity is a less speculative endeavor. You’re not building a data center hoping to sell compute to the AI startups of the future; you’re building a data center knowing that you can sell compute at the futures price that you’ve locked in.
But this is all pretty early and small right now; the compute futures are more of a proof of concept than a robust liquid market for AI computing.
Here is a fascinating story from Semafor reporting that “the US Commerce Department last month ordered Kalshi to take down one of its products tracking the price of AI compute,” and has “also pushed the Commodity Futures Trading Commission … to effectively freeze approval of new compute contracts for 60 days.” (“’This story is false,’ a Commerce spokesman said,” though.) Why? “It’s unclear why Commerce is worried about the nascent market,” but:
One potential reason floated to Semafor by market participants is that compute futures could be manipulated to show a sharp drop in the cost of older chips, which might destabilize AI stocks and debt markets. Some of these markets are thinly traded, which could lead to volatility even without bad actors.
That is: Maybe you can spend a small amount of money to manipulate the market for the value of computer chips as long-term debt collateral. The whole AI economy is, arguably, built on that value. If it goes down, maybe hedge funds will notice. Maybe that will crash the prices of AI stocks and bonds. Maybe you can make a lot of money in the biggest market by spending a little money in the compute futures market.....
....MUCH MORE in that issue of Money Stuff:
The Whole Indian Options Trade Was Too Good
EbitdAI
Not like other AI safety advocates
Things happen
So much more.
